No Go For Harvey But Christmas Bells Ahead?


Gerry Harvey has no excuse now for not delivering profits as the interest rate cut he so desired has been delivered. Harvey’s dreary profit announcement late Monday, which showed a landslide 20 percent dip on the back of domestic sales of 2.8% for the July-September, sent markets into a tizzy with shares falling 2.09c yesterday – one of its lowest levels in over a month.

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Christmas cheer for retailers?

Harvey’s shares closed up 1c to $2.17 following Monday’s announcement, but got a trouncing Tuesday falling to a dismal $2.03.

The strong Aussie dollar, price deflation and “intense” competition eroding prices were among the factors for the steep decline.

But Harvey’s international picture was not much brighter with sales in Ireland North and South, Croatia and Slovenia dipping 3.8% to $1.48 billion, which the retailer blamed on the deterioration of foreign currency against the Aussie dollar.

However, Christmas may have come early for Gerry Harvey, who yesterday got the interest rate cut he so desired, with the Reserve Bank cutting the official rate by 0.25 basis points to 4.5%.

For the first time in 2.5 years the RBA slashed interest rates yesterday, which banks including Westpac, Commonwealth and Bank Of Queensland have confirmed will be passed on to customers.

”I think the rate cut would be enough to create headlines in all the media, and I think there would be a shot of confidence because a large number of people out there are quite despondent and the one thing they need is confidence, and some people say confidence is everything and in this case it would be a very good thing to do,” Gerry Harvey said earlier this week.

Harvey Norman’s Chairman also declared it was in the “national interest” but it is certainly in ailing retialers’ interests to boost consumer sentiment ahead of the holiday rush.

And Harvey Norman rival JB Hi-Fi’s CEO, Terry Smart, agrees.

“Consumers need positive news and it [rate cut] can only assist in boosting sales … there has been nothing but negative news on the market,” he told SmartHouse today.

“This will help alleviate the family budget and loosen the purse strings.”

However, the cut doesn’t necessarily mean retailers can automatically assume the gravy train is coming, he warned.


“It’s hard to predict how consumers will react,” Smart admitted, “but [it] can only encourage” spending, which mirrored comments made by a Woolworths spokesperson to SmartHouse earlier this week.

So, does JB Hi-Fi have any notion on what’s going to be hot among consumers this Christmas if a pre-holiday spending spree comes to pass. iPad 2, Samsung’s new Galaxy Tab (oops, forgot, that’s banned), iPhone 4S or Modern Warfare 3, perhaps?

Smart refused to comment but did say he was “confident” JB was “best positioned to take advantage of the Christmas period with a broad product mix like cameras, phones, gaming and computers.”

And what about the Aussie dollar, which has hit retailers’ margins and caused price deflation on key categories? Should the dollar come down, this may have a positive effect on flat panel prices, Smart said.

Myer CEO Bernie Brookes also welcomes the cut, saying it was one “helping all discretionary retailers.”

“We are pleased with the announcement, we see it as the first of potentially quite a few over the next 12-18 months.”

And it looks like Brooks and Smart’s retail outfits as well as David Jones could be the top two winners from yesterday’s cut, analysts believe, while Harvey’s prospects look dim.

Myer’s sales, in particular, will outperform expectations. Note, Harvey Norman was not included in the winners list.

Speaking about the possibility of a rate cut this week, UBS analyst Ben Gilbert, said: ”We estimate every 1 per cent sales [increase] would deliver a 3.2 per cent EBIT upgrade, all else being equal. This compares to David Jones and JB Hi-Fi which generate EBIT leverage 2.2 times and 1.5 times respectively.”

Macquarie also say Harvey Norman shares “continues to lose its appeal” and even an interest rate cut can stop Harvey’s ongoing woes and questioned the future viability of its franchise model.

“Not even the property angle or an interest rate cut is likely to fix this one. Our full-year profit before tax estimate includes a 10 per cent fall, so no change to earnings,” Macquarie analyst, Rob Blythe, said.

“A deteriorating gross profit margin at retail is expected to be reflected in a further deterioration in the first half of 2012 with little prospects of higher margins in the future.”


JB has also been recently tipped as hot property by Merril Lynch report, which hailed it as a ”bright light” in a difficult retail environment with new store openings, and is gaining marketshare over rivals Dick Smith and Harvey.

”If the Dick Smith business were to be rationalised or consolidated with Big W, increased consumer caution and higher domestic savings rates would expect this to further strengthen (JB Hi-Fi’s) position as the market leader.”

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