Australian Stocks to Watch: Harvey Norman (HVN)

ASX Stocks to Watch: Harvey Norman (HVN)|ASX HVN|HVN SharesHarvey Norman (ASX:HVN) is an integrated franchisor, retailer and property entity, operating a slew of retail stores under three leading brand names: Harvey Norman, Domayne and Joyce Mayne.

Together, these stores sell computer hardware and software, furniture, bedding, electrical appliances, floor coverings, and kitchen and bathroom renovations and items.

Retailers were struggling over the global economic downturn, particularly hit throughout 2008 as high interest rates, climbing unemployment and sluggish consumer spending took a toll.

The trend is now continuing as external environmental pressures, and recent concerns that retail spending is slowing down in Australia has negatively hit HVN’s stock.

Pressure from a rising Aussie dollar and online retailing has seen HVN become one of the shares to sell in recent times.

Challenging market

We have already seen a slowing in consumer spending as rising interest rates put pressure on consumer spending. Making matters worse is the fact that the banks have raised interest rates by more than what the Reserve Bank (RBA) has done.

Yesterday, the RBA left the official cash rate at 4.75% against the backdrop of global market uncertainty.

The central bank noted that asset prices had softened in recent months and consumer demand was likely to remain weak in the near term.

We saw new home sales slumped 8.7% from May to June, as Australians grew worried over the global economy and the potential for further interest rate hikes.

The huge decline in home sales provides further evidence of a struggling housing market, and raises concerns over the impact of another rate hike on the economy.

Being also involved in furniture and other appliances, this news hurts HVN’s business.

All the major banks have signalled concerns over slowing credit growth and subdued business and consumer spending.

The effect has taken a toll on the most of the retailers. Recent jobs data showing a huge drop in full time jobs also presents further downside for the retailer.

The rising Aussie dollar has seen consumers shift towards purchasing products from overseas retailing websites. This has impacted on sales at the local retailers and has put pressure on prices and margins for operators like HVN.

Deflating profits

In February, Harvey Norman announced a 17% slump in 1H11 net profit to $131.7 million.  The fall in profit was attributable to price deflation, a strong Aussie dollar and the wet weather impact on sales.

Revenue grew 12.4% to $804.1 million however sales were impacted by consumer caution due to last year’s interest rate hikes.

HVN’s outlook was positive despite economic and market headwinds.  A final dividend of 6 cents was declared, down from 5 cents a year earlier.

HVN reported a 1.4% on-year increase in sales for the nine months ending March 31, 2011.

However, like-for-like sales fell 3.5% in the same period. HVN said the poor result was attributable mostly to adverse currency movements.

Looking ahead

A weak consumer environment implies sales growth is likely to remain subdued in the medium term.

Retail figures continue to disappoint on the back of subdued business and consumer figures.

Other factors such as increasing online retailing due to a stronger Aussie dollar have hurt the sector.

The rise and rise of online retailing has also hurt HVN and its peers. Gerry Harvey has been particularly vocal about the threat of online retail to his business model and continues to put pressure on the government to take action.

Unfortunately for the retailers, with the Aussie dollar as strong as it is, shopping online is becoming increasingly cheaper.

Harvey Norman will thus be one of the stocks to watch in the near future, as it is likely to continue facing these headwinds.

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