Times are really tough at Harvey Norman, despite a reported 9% rise in net profit, the company cut its dividend by 16% to 12 cents a share for the 2011 financial year from the 14c paid in 2010.
The company said yesterday that shareholders (including chairman Gerry Harvey) would receive a final dividend of 6c a share, down from the 7c a share paid for the final half of 2010.
The interim was also cut to 6c a share from 7c.
The cut in both the interim and final dividends tells us more about the way the Harvey Norman board sees the outlook for the year than any commentary can tell us.
But there were no reasons advanced for the cut by directors who described the outlook as "cautious".
The shares edged higher, topping out at a day’s high of $2.13, before they retreated to end at $2, down 3c, in a market that fell after Telstra was solid off in the wake of a negative first reaction to the NBN deal and separation.
The details of the result shows that Harvey Norman’s property investments produced a jump in profit in the year to June 30, allowing the group to offset a fall in retail franchise revenue and earnings and book a 9% rise in net earnings.
Harvey Norman said yesterday that net profit after tax increased to $252.26 million in the year to June 30, up from $231.41 million in the previous year.
Revenue was $2.70 billion, compared to $2.45 billion in full year 2010.
The heart of the company is the franchised retailing businesses in the company’s many stores across the country. Harvey Norman doesn’t actually sell the goods, its franchisees do.
The company said in yesterday’s statement that the earnings before tax in the franchising operations segment was $254.59 million for the year ended 30 June 2011 compared to a result of $310.68 million for the preceding year, a reduction of 18.1%.
"Our franchisees are committed to driving sales growth and growing market share. However, the strength of the Australian dollar, price deflation and intense competition has eroded average selling prices and, ultimately, retail gross profit margins. These factors have reduced franchise fees received."
Directors said the reduction in the profitability of the franchising operations of $56.09 million ($39.26 million after tax) was "due to lower franchise fees collected during the year."
The company revealed the earnings before tax contribution from property jumped to $149.05 million, from $67.45 million in 2010. That $74.6 million provided the entire boost to the net profit of $52.4 million for the June 30 year.
Directors explained that rise in "the net property revaluation increment of $15.46 million before tax ($10.82 million after tax) recorded by the Australian investment property portfolio and joint venture entities for the current year compared to a net revaluation decrement of $39.91 million before tax ($27.93 million after tax) in (the) prior year, a turnaround of $55.37 million before tax (or $38.75 million after tax).
As well there was "an increase of $16.70 million before tax ($11.69 million after tax) in rent received from franchisees and third party tenants", despite a 5% fall in overall retail sales through the franchisees in the year to June 30 and an even bigger 6.5% plunge in "like for like" (or same store sales).
Directors also revealed there had been a reduction in the losses incurred by the company-run operations in the Republic of Ireland and Northern Ireland of $12.55 million before and after tax attributable to favourable foreign currency movements, "lower impairment charges recognised during the current year and operational efficiencies and cost control measures implemented by management during the year."
The profit also included a profit of $7.34 million before tax ($5.14 million after tax) recognised on the sale of a development property located in and a rise of $4.24 million before tax ($2.97 million after tax) in the market value of the listed public securities and dividends received by the consolidated entity relative to prior year; and the stronger result generated by the retail operations in Singapore, Malaysia and Slovenia "which have increased profitability by $4.65 million before tax collectively compared to the previous year."
The company said there was also "start-up investment costs and trading losses of $41.07 million before tax ($28.75 million after tax) incurred in the Clive Peeters and Rick Hart operations since its acquisition in July 2010; and a reduction in the result of the retail operation in New Zealand by $5.63 million before tax ($3.94 million after tax) due to the turbulent trading environment which has deteriorated further pursuant to the GST increase in October 2010 and the major natural disasters in Christchurch.
"The above factors contributed to a lower tax charge in the income statement by $34.16 million mainly attributable to: a reduction in profit before tax from $386.46 million in the previous year to $373.94 million in the current year, a decrease of $12.53 million; the recognition of deferred tax expense of $19.67 million in the previous year (nil in the current year) resulting from a New Zealand legislative change effectively excluding a tax deduction for future building depreciation expense; and an increase in the research and development tax concessions following increased capital expe
