But despite very strong like-for-like growth of 3.6% in 2Q, the result fell short of analysts' estimates of a 4% LFL lift for the half year.
"We had expected a robust result in Australia following positive industry feedback regarding key Christmas trading, and management commentary continued to remain upbeat, particularly on the benefit of the pickup in the housing market in its core homemaker category."
"Earnings from the division were disappointing due to the drag from store closures and the absence of margin expansion" writes Deutsche Bank analyst Michael Simotas in a research note.
EBITDA was slightly below expectations with Australian franchisees, New Zealand and Asia coming in below forecasts.
However, this was partially offset by a better-than-expected performance by the retailer's property portfolio and Irish operation.
Global sales for the half year increased to $2.99 billion, up 3.6%.
However, Australian sales are improving on a like for like basis in the December quarter, and an earnings jump should follow with operating margins also to eventually lift.
Deutsche Bank are positive about the retailer's outlook, predicting an improved AV cycle to boost its fortunes this year.
"We believe the strength in the established housing market and an improving AV cycle should drive continued sales momentum which should eventually reduce the requirement for tactical support and deliver some operating leverage."
Harvey Norman management predicting the rising house prices and uptick in housing construction will benefit its homemaker category; the World Cup in June to boost demand for larger screen TVs; and also cited the launch of many new mobiles and tablets.
Underlying earnings EBIT which rose 11% to $186.9m and net profit after tax was $117.45 up 3.6%, was in line with DB estimates. This was due to lower than expected depreciation and amortisation, with a lower interest cost offset by a higher tax expense.
However, Deutsche Bank downgraded Harvey's FY14 EBITDA by 2.6% on the back of flat operating margins although forecasts revenue to jump 2.4% and NPAT remain unchanged.
"We had been hopeful that the continued improvement in LFL sales growth would have driven some operating leverage and improvement in system profitability. Unfortunately, this wasn't the case, with EBITDA margins for the Australian Franchising Operations lifting only 7bps on our methodology (including Clive Peeters).
Excluding Clive Peeters, EBITDA margins declined by 13bps in HY14, analysts estimate.
Macquarie Equities analysts also positive about Harvey Norman latest results, although flagged some concerns including AV category still under pressure and weaker LFL sales in January.
"Signs of life"
Harvey's franchisee business "showing signs of life", with sales was 3.22% in the half, up from 2.91% in the 2H13, according to Macquarie Equities analysts.
But, unlike rival JB HIFi and Dick Smith, no store openings planned for 2H14 in any geography was flagged a possible concern, in a research note to investors. There was nine store closures at December 2013 compared to a year earlier.
Harvey's like for like sales growth also slowed to 1.4% in January, attributed to cycling a strong January 2013.
In addition, the Audio Visual category remains under pressure, note Macquarie analysts, albeit the pace of Average Selling Price decline is lower than prior.
"Whilst the backdrop for homemaker items is positive, average selling prices in AV/electronics were still said to
be declining, but at a lower rate compared to FY13."
The TV market has also halved in value to $1.6 bn, compared to $3.4 bn in 2009, which could impact the retailer in the future.
Analysts also flagged salaries increasing by 14% in 1H14 after a a wage freeze at head office believed to be in place for a number of years.
Support provided by head office to franchisees during the period fell by 20% to $51.2 m compared to 1H13 , due to improved profitability of franchisee stores and was "an encouraging outcome."