Deflation ends for retail

The worst appears to have passed for retailers like Harvey Norman with low interest rates driving sales.

The price deflation that has plagued retailers like Harvey Norman (HVN) has ended.

While the homeware and electronics goods operator recorded a 17.5% decline to $142.2 million in earnings in the year to June 30, there was a marked improvement in the second half of the year, both in terms of revenue growth and margins, indicating the worst has passed for the industry.

Franchise margins in the half year grew to 1.8%. That’s skinny when compared to the 3.7% achieved in the December half of 2011 but an improvement on the anorexic 1.4% in the previous corresponding period.

Pressure from the strong currency that depressed prices and the value of stock while boosting competition has eased significantly since May when the Australian dollar dropped 12%.

And when combined with record low interest rates, founder Gerry Harvey believes the momentum that has built in the first two months of this year will continue on until Christmas.

Sales growth also picked up in the second half. For the full year, Australian sales contracted 4.2%, following a horrendous performance in the lead up to Christmas but the back half of the year saw sales lift 1.5% in the third quarter and improve to 2.6% in the fourth quarter.

New Zealand was a standout performer on the sales front, while Slovenia and Croatia continue to bat up disappointing results. Ireland and Northern Ireland delivered erratic sales performances with wild swings in earnings.

While late to the party in online sales, despite its focus on electronics and technology, the company now has committed to lifting its online performance.