Harvey Norman Closes Ten Non-Performing Stores as Sales Remain Weak

Harvey Norman reported a first-half fiscal 2014 increase in group revenue up 3.6% to AUD 2.99 billion, with net profit after tax, or NPAT, excluding net property revaluations up 3.6% to AUD 117.4 million. International revenue benefited from a weakening Australian dollar, while underlying Australian revenue gained just 1.4%. We view this relatively weak sales performance, in a period of rapidly rising housing activity, as symptomatic of the structural headwinds facing Harvey Norman, as price-sensitive consumers increasingly go bargain-hunting online at competitors such as Bunnings and JB HiFi. Our fair value estimate reflects our view that returns will materially diminish over the next five years as competition for revenue builds. We make no change to our fair value estimate of AUD 1.70, or our high fair value uncertainty rating. We believe persistent weakness in revenue contributions will be the catalyst for the market to converge the share price in the direction of our fair value estimate.