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Analysts Cut Harvey Norman Earnings, Q1 Disappoints

Analysts cut Harvey Norman’s FY14 earnings forecast by 1%, as first quarter 2014 sales fall below expectations in ANZ. 

Like for like sales from HN key Australian operations was 2.9% but total sales rose just 1.2% due to the impact of two store closures, warns Deutsche Bank analyst, Michael Simotas, in a research note.
“Sales momentum has broadly been maintained on a LFL basis but the drag from store closures is likely to remain a factor”. 

Falling sales in New Zealand were also “disappointing”, said Simotas, although performance of overseas operations including Slovenia, Croatia were in line with expectations. Global sales rose 2.7% for the electronics retailer’s September quarter.  
Analysts now forecast Harvey Norman FY14 profit to rise 13% to $279m (before property revaluations) – down from 16.2% profit lift reported in 1Q, hitting $58.2 million.  

“The substantial growth in profitability in 1Q provides evidence that some operating leverage is being generated in the franchise system”, says Simotas.  

Harvey’s FY14 earnings, sales are forecast to rise to $420m and $1.43bn, respectively, up from FY13 revenues of $1.32 bn, according to DB latest estimates. 

FY15 and FY16 are also set to see the retailer’s performance improve. 

On Tuesday, Chairman Gerry Harvey warned the business had not seen a boost to consumer spending post-election but is optimistic about Christmas trading. 

Analyst have advised investors to place a hold on shares. Shares are currently at $3.3 – down 1.3% – in early trading today. 

Future risks to Harvey Norman business include: stronger/weaker consumer sentiment; a smaller/ larger than expected impact from new competitors; a faster/ slower recovery from the offshore businesses, analysts believe. 

In FY15 and beyond, DB analysts have reduced expectations for operating leverage which drove larger downgrades.