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Retail wrap: sales grow for Harvey Norman, but proof will be in the Christmas pudding for Myer

Emma Rapaport  |  03 Dec 2018Text size  Decrease  Increase  |  
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Shopping mall christmas

Two giants of Australian retail – Myer and Harvey Norman – made headlines again last week, both facing the fury of shareholders at annual general meetings.

First up, Harvey Norman (ASX: HVN) shareholders delivered the board and management a blow on Tuesday, voting to reject the retailer’s renumeration report. The vote marked a “first strike”, which if repeated next year, could see investors vote on a spill motion. Company founder Gerry Harvey, 79, responded in his typically idiosyncratic manner, labelling critics "totally friggin mad".

The theatrics continued Friday at the Myer (ASX: MYR) where the company's largest investor, Solomon Lew, rallied shareholders to destabilise the board. There were early signs of a revolt: more than two thirds of shareholders (37.49 per cent) voted against the adoption of the remuneration report. However, shareholders subsequently voted 63.26 per cent against a motion to spill the board.

The meeting follows a gruelling month for Myer during which the retailer was forced into a trading halt after some sales figures were allegedly leaked to the press. Management responded by issuing a quarterly trading update - contrary to its original intentions not to.

Myer reported a 4.8 per cent decline in total sales in the first quarter of fiscal 2019, with like-for-like sales down 4.3 per cent. The unaudited sales figures reported by the company differ from those quoted by the press.

Morningstar analyst Johannes Faul says the Christmas period will be crucial – as usual – and could “make or break” the company’s year.

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Faul has maintained his $0.63 fair value estimate on no-moat Myer following the trading update.

"Although the sales update was disappointing, it didn’t come entirely out of left-field," he says. "Myer had flagged that sales performance would be volatile throughout fiscal 2019."

"Myer has been operating at a loss during the first quarter for the past five years, and we expect the Christmas trading period to make or break Myer’s year, as has always been the case historically.

"Our investment thesis stands," Faul says. "Myer’s sales remain flat long term, as the chain continues to lose market share to online players and specialty fashion stores.

"The department store sector, including Myer, gradually reduces floor space as footfall declines with Australian consumers increasingly shop online."

At 3pm on Monday, Myer shares were down 2.20 per cent at 44.5 cents.

For Harvey Norman the results were mixed. Total sales in the Australian market fell 1.3 per cent over the first 145 trading days of financial-2019 and franchisees lost market share.

However, Faul notes the decline in franchisee sales is more than offset by the strengthening international company-operated store network.

"In constant local currency, sales growth improved in all countries," he says. "This was the key driver of our group sales growth forecast increase."

The update numbers have not changed Faul's long-term investment thesis for Harvey Norman. He continues to forecast intense competition from JB Hi-Fi, The Good Guys, and Amazon in the core Australian market, and expects the fierce competition in Australia to result in higher spending on tactical support for franchisees and lower franchising fees, weighing on earnings before interest and maxes margins.

At 3pm on Monday, Harvey Norman were trading at $3.15, slightly undervalued to the $3.40 fair value estimate.

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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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