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Why the Harvey Norman share price is surging 7% higher

Phil Harpur
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The Harvey Norman Holdings Limited (ASX: HVN) share price has performed very strongly today on the ASX, currently up 7.75% at the time of writing.

The diversified whitegoods and electronics retailer has made no recent announcements to the market. So, it is possible that investors are attracted to the more defensive nature of the retail sector in a currently volatile market.

Over the past 12 months, the Harvey Norman share price has been a standout performer in the ASX retail sector, increasing roughly 40%.

This is an impressive performance in a market where the retail sector has been under pressure over the last 12 months, with consumers cautious about spending in a sluggish Australian economy.

Recent financials show solid growth

In FY2019, Harvey Norman reported profit before tax (PBT) of $575 million, up 8.4% on the previous year. The retailer also notched profit after tax and non-controlling interests for FY2019 of $402 million, up 7.2% on the year prior.

According to a sales update in November 2019, the aggregated sales from wholly-owned company-operated stores and from independent Harvey Norman, Domayne, and Joyce Mayne branded franchised complexes totalled $2.44 billion for the period July 1 to October 31, 2019. This was an increase of 2% on the aggregated sales generated compared to the prior corresponding period.

Growing competition from online retail sector

Bricks and mortar stores are facing growing competition from online retailers such as Amazon and Kogan.com Ltd (ASX: KGN). A number of retailers such as Harvey Norman and JB Hi-Fi Limited (ASX: JBH) have implemented a multi-channel retail strategy, offering both retail outlets and online delivery services as well as buy online and pick-up in-store options. However, maintaining a chain of retail stores is very capital intensive and can eat into profit margins. This being in a retail market where consumers have a growing range of retailers to choose from, both locally-based and overseas.

Kogan, for example, unlike most retailers, doesn’t actually own any warehouses and stores. Instead, its inventory is kept in third-party-owned locations where Kogan is charged on a per-product or per-pallet basis. The company has also automated as many of its processes as possible, to further minimise staffing costs.

Amazon officially launched in Australia with a local Australian website back in December 2017. While it was slow to ramp up, it appears to be now gaining strong momentum.

Foolish takeaway

With the ASX 200 strongly weighted in the Materials and Financials sector, shares in Harvey Norman can diversify your portfolio by way of exposure to the consumer discretionary/retail sector. Harvey Norman shares also trade on an excellent trailing dividend yield of 7.2%, fully-franked.

However, there’s growing pressure from online retailers and a sluggish Australian economy to be mindful of. If you are thinking about purchasing Harvey Norman shares, you may wish to wait for the company’s February results. Harvey Norman’s ability to maintain/grow its earnings in challenging market conditions and capacity to continue to pay out such a high dividend will certainly be on watch.

The post Why the Harvey Norman share price is surging 7% higher appeared first on Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Phil Harpur owns shares of Kogan.com ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia has recommended Amazon and Kogan.com ltd. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020