Harvey Norman’s Hardly Normal Result

Australia | 11:30 AM

Harvey Norman’s sales growth slowed sharply late in the first half and into the second. There are tailwinds ahead, but also headwinds if the RBA becomes more hawkish.

• Harvey Norman saw a sharp slowing in Australian sales late in the first half
• International, particularly NZ, performed well
• Tech replacement cycle a potential driver
• RBA rate hikes a risk

By Greg Peel

Home and lifestyle retailer and franchisor Harvey Norman ((HVN)) reported a sharp slowdown in like-for-like sales growth in its dominant Australian business in the last six weeks of the first half FY26 to -1.2% (negative) from 6.4% growth earlier in the half, with first half profit missing market expectations, sparking a 9% sell-off in the shares.

Earnings were strong, rising 16% year on year, but this was still below expectations as Australian sales slowed materially into the Black Friday/Cyber Monday period and Christmas, Jarden notes, to be flat at best. This, combined with higher D&A and lower property earnings drove a -2% earnings miss, with cash flow also weaker on higher inventories.

It appears to Ord Minnett the earlier Black Friday sales in 2025, two weeks earlier than in 2024, has simply dragged purchases forward and exaggerated the initial rate of sales growth, rather than growing the whole pie or the retailer winning market share.

The Australian franchising business of Harvey Norman reported sales growth of 4.8% in the first half, versus 6.3% for JB Hi-Fi's ((JBH)) Australian business and 4.1% for the competitor's wholly owned The Good Guys chain, and 4.7% for Officeworks ((WES)), Ord Minnett notes.

Further denting sentiment towards Harvey Norman was the weak start to the second half, with like-for-like sales growth in January of 3.6%, well short of the market's forecast for 5.7% growth in the second half of FY26. However in this case, sales growth exceeded that of JB-Hi Fi (2.4%), The Good Guys (2.7%) and Nick Scali ((NCK)) (3.2%), UBS points out.

Pleasingly for Citi and Macquarie, franchise margins still improved materially despite 1H26 sales growth missing forecasts.

Moreover, the international businesses are mostly firing.

International

Comparable sales at the one UK store in the Midlands were up 17.8% year on year, as Harvey Norman builds a presence in that market. Management appears to be committed to the English market for the foreseeable future, Macquarie suggests, guiding to a second store to be opened in April, and a potential third in early 2027.

While materiality of the opportunity remains a key question, Macquarie suggests early indications are positive.

That said, the UK posted a loss of -$13.4m, due to English start-up losses (-$11.0m) and Northern Ireland trading losses, which UBS notes are likely to continue, with Harvey Norman having established a support structure for a larger network. The pace of store maturity is likely to be elongated.

Ord Minnett expects losses in the UK to continue in the short term, but the size of the British market and its potential mean the broker is happy to wait for results at this stage.

Meanwhile, New Zealand posted comparable sales growth of 7.3% year on year in the first half, accelerating to 9.3% in January, providing a partial offset to disappointment in Australia.

In a tough Kiwi economy at present, management noted improving conditions and that it was well positioned to gain share from recently closed competitors Kitchen Things and Smiths City, while margins were also better managed than UBS expected due to disciplined cost control.

A further six new leases have been signed in Malaysia. This will take the store count to 45, just over half of the long term 80 stores target by 2030. Citi remains optimistic on the long-term profit opportunity in Malaysia.

Other key markets including Ireland (sales up 8.0%) and Singapore (4.0%) are also trading well, Citi notes.

Technology

The tech space is enjoying structural tailwinds, Jarden notes, via the replacement cycle and AI. Product cycles are shorter, and hardware requirements are higher, driving more devices per household.

Harvey Norman looks well positioned to capitalise on the trend with more than 25% of Australian sales represented by IT and large destination stores designed to showcase product.

Jarden sees a number of catalysts into the second half, notably inflation, given computer memory price increases are coming, which should drive sales and gross profit, further fuelled by AI adoption, and the replacement cycle, affecting a sales tailwind that will build through 2026.

Jarden retains a positive view, with the key risk being market share loss, which the broker believes occurred in the December quarter with JB Hi-Fi / Officeworks / Amazon likely taking share.

Jarden believes Harvey Norman should be best positioned to execute on new tech in the market based on past performance.

Signs of improving market share will be a key focus.

Cost of Living

The market appears to be focused on potential downside risks to consumer spending if further RBA cash rate hikes materialise, Macquarie notes, though management emphasised its customer cohort is generally mid-to-upper income, providing some insulation to cash rate hikes.

Macquarie’s Macro Strategy team expects the RBA to remain on hold in 2026, however, this view pre-dates the spike in oil prices sparked by Trump’s attack on Iran and subsequent Iranian attacks on Middle East oil infrastructure.

Were oil prices to remain elevated, or worse still rise further, the impact on already sticky Australian inflation would likely force the RBA’s hand.

Harvey Norman suggests its customers are insulated from rate hikes, but Ord Minnett has downgraded its forecasts to incorporate the rising interest rate environment, which this broker suggests has a deeper impact on Harvey Norman’s customers than those of its rivals, as well as the negative effect of the stronger Australian dollar on translation of offshore earnings and delays to achieving profitability in Britain.

Citi believes Harvey Norman looks good value given it remains confident the Australian consumer will remain resilient, but the risk to that view is a more prolonged rate hiking cycle than anticipated.

Citi is forecasting one more rate hike in May, but again, that pre-dates Iran.

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