Harvey Norman profit to fall 40% – what is Gerry doing to get back on top?

Harvey Norman will need to produce a game-changing reform of its business structure if it wants to survive in the next generation of retailing, experts say.

The warning comes after a shocking day for the department store yesterday – it admitted full year profit will plummet by as much as 40% due to a shocking reduction in sales.

The company said yesterday that total, global like-for-like sales for the year had fallen 6.5%, while Australian sales have fallen 8.1%. In the fourth quarter, they fell 10%.

Preliminary accounts show that for the full year, profit before tax will come to just $227.6 million – down 39.1% from last year’s result.

“Trading conditions continue to be challenged, coupled with deflationary headwinds particularly in the technology categories,” it said.

“Home appliances, furniture and bedding remain stable and the businesses are well placed for any upturn in housing starts.”

But City Markets chief analyst Peter Esho tells SmartCompany it will take a little more than an uptick in sales to help the company.

“If we look at the share price now, it’s pretty much just sitting on the valuation of the property assets,” he says.

“The market is giving away no value for the retail business, even though it’s still profitable. So there needs to be a game-changing strategy around the retail operation.”

So how is Gerry Harvey attempting to turn Harvey Norman around?

For one thing, Harvey has repeatedly said the company has identified the issue of deflation in flat-screen panels, although a response hasn’t been so clear.

Harvey has also said the company has put some property developments on hold, despite having opened between five and 15 stores a year previously.

The company also gave its website a boost last year, finally opening an online sales channel.

And in April, Harvey visited Tasmania to find out what he could do to improve service and respond to the local fluctuations in the economy.

“I talk to customers to find out if they’re satisfied with our service and how and where we can improve,” he said. “It’s all good PR, and listening to customers can spark a fresh idea. Just one good idea can make a difference – for the better.”

But Esho says given today’s results, it’s going to take more to get Harvey Norman on track.

“If we were to speculate about what that might be, perhaps even some sort of international tie-up. Woolworths set a precedent there with its hardware venture with Lowe’s.”

“Gerry Harvey is an astute business person, and I think the market may need something like that, or at least, something in that order.”

Esho says until such a plan arises, the company’s share price will continue to reflect its inferior position.

“It’s going to sit at that real estate value level and maybe fluctuate. But it’s going to take a game-changing strategy, and I wouldn’t expect any bigger improvement until we see that strategy.”