Is the Harvey Norman share price good value?

The Harvey Norman Holdings Limited (ASX: HVN) share price has fallen 16.44% in the past year. In contrast, the S&P/ASX200 Index (ASX: XJO) has dropped 9.35%. Despite underperforming, The Harvey Norman share price could represent good value when considering its long-term, international growth potential.

The group is a leading retailer in Australia with company operated stores and a franchise model. Additionally, Harvey Norman has a growing international presence in New Zealand, Ireland, Slovenia, Croatia, Singapore, and Malaysia.

Recent updates

Last month, Harvey Norman announced a profit increase of 20% from unaudited preliminary accounts for the period 1 July 2019 to 31 May 2020 compared to the prior corresponding period. However, this excludes the net impact of the accounting standard for leases and net property revaluation adjustments.

Additionally, Harvey Norman cancelled its 12-cent dividend in April this year. However, it did pay a 6-cent per share special dividend to shareholders last month. The cancellation and cut in dividend is a result of the company taking a conservative approach in view of the current economic environment.

Australian Franchisees experienced increased sales of 7.4% for the period 1 July 2019 to 31 May 2020. I believe this was assisted by government stimulus measures Jobkeeper, Jobseeker and early access to super.

Harvey Norman is scheduled to release its full year earnings on 28 August 2020.

International growth

According to Harvey Norman’s 1H FY20 half year report, there has been a 50% growth in its total overseas retail revenue and 345% growth in total overseas retail profit results over the last five years.

Malaysia appears to be a major growth driver for the company long term with the South East Asian country’s economy growing on average 5.4% per year since 2010. 

The international segment of Harvey Norman’s business has been impacted by closures in its overseas stores. However, the reduction in sales in local currencies was somewhat mitigated when converted into Australian dollars because of foreign exchange rates.

Foolish takeaway

Harvey Norman has experienced a lift in sales which has helped deliver a 20% lift in profit before adjustments. This is quite extraordinary considering that, in an economic downturn, consumer discretionary shares are usually hit hard. In my view, this has been a result of government intervention through stimulus measures leading to a strong rebound in retail sales.

Since the temporary closures of some Harvey Norman international stores for a period of time in FY20, most have re-opened to business as usual. This could assist a recovery in sales in the company’s international stores in FY21. Additionally, an investment in the Harvey Norman share price today could reward investors with appreciating value over the long term as the company benefits from its international expansion strategy. 

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Motley Fool contributor Matthew Donald owns shares of Harvey Norman Holdings Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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