Goldman Sachs noted that Harvey Norman’s first-half 2013 result of $99.8 million net profit after tax came in above its estimates of $90.7 million. Goldman had previously had a sell rating on the stock on the basis that a continuation in weak trading conditions in the near term would hurt Harvey’s ‘system’ profitability as they continued to support franchisees.
However, the first-half result and recent sales suggest trading conditions, and thus the franchisee support, have now bottomed. "While some of Harvey Norman’s key categories are likely to face continued structural challenges (such as browngoods), other categories have good exposure to the Australian housing cycle (such as furniture and whitegoods)," Goldman Sachs said in a research note. "This offers scope for good earnings leverage when consumer spending improves."
Macquarie Group basically concurred with Goldman’s views, adding that despite what it saw as a poor operational result and further deteriorating in Harvey Norman's business model, it believed the market will look through the weak comparable numbers in anticipation of a retail recovery. There are already signs of this recovery as results from across the sector have resulted in large upside moves.
As a side note, there continues to be a large short position (9.8 per cent of shares on issue) in Harvey Norman. This is down from around 12 per cent at the beginning of the year and has no doubt played a big part in the price surge the stock has seen in 2013. So far, it is up 31 per cent.