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Will Harvey Norman Margins Get Squeezed & What Is The Future For Myer?

As big US retailer Sears crashes into bankruptcy questions are now being raised in Australia about the future of Myer and whether they will head the same way Sears. questions have also been raised about the future earnings of Harvey Norman.

Motley Fool said of the Sears situation that ‘It seems hard to believe that the retailer has gone bankrupt considering it had over 3,000 stores once upon a time. Just a few years ago it had nearly 250,000 employees in the US, but it ended with only 90,000. Large does not equal success”.

Whilst the US$5 billion debt was the cause of the bankruptcy, it was poor business management and online shopping that led it to its demise.

If retailers don’t have the products that customers want, presented nicely in a store at a decent price then people will go elsewhere.

The demise of US shopping malls has been happening for a long time. ‘Ghost’ malls are everywhere. Out-of-town locations that were far too big with little to grab interest have closed. Why go to a large store when you have the whole internet that can deliver to you? For free! (If you have Amazon Prime.)

Australian retail is several years behind the US. Amazon (and other online retailers, like eBay) have been operating for many years there.

The ‘weak’ are perishing in the US, but the businesses that can adapt can still survive. Or even flourish. Even Walmart has shown what can be done with better service.

They claim that in Australian retailers need to take note.

Myer Holdings Ltd could be going down a very similar path to Sears if it doesn’t sort out its issues. South African-owned David Jones can’t be complacent either.

Many of Australia’s retailers have been investing in their online offerings and also making sure that their prices are competitive.

However, Harvey Norman Holdings and JB Hi-Fi Limited will need to make sure they continually update themselves, so they are like the US’ Best Buy and not Dick Smith Electronics.

Wall Street Analysts have also questioned Harvey Norman’s future earnings claiming they appear to be questionable.

The big retailers with latest-twelve-month earnings of $375m are tipped to fall to $369m by 2019.

8 analysts covering HVN view its longer-term outlook positively. Generally, broker analysts tend to make predictions for up to three years given the lack of visibility beyond this point.

What they are tipping is an growth rate of 0.1% based on the most recent earnings level of $375m to the final forecast of $367m by 2021.

However, if we exclude extraordinary items from net income, we see that earnings are projected to fall over time, resulting in an EPS of A$0.31 in the final year of forecast compared to the current A$0.34 EPS today.

Analysts who are predicting high revenue growth claim that the Harvey Norman growth will squeeze profit margins over time, from 19% to 10% by the end of 2021.

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