Harvey Norman Could Increase Franchising Margins

By Martin Vedris

SYDNEY: Retail analyst Credit Suisse has predicted share price increases for Harvey Norman and JB-Hi-Fi and a case for increasing franchising margins for Harvey Norman as a result of the recent restructuring at Retravision and Betta Electrical.

In a retail sector report on the consumer electronics category released today, Credit Suisse stated that the electrical retail sector is undergoing a period of consolidation. Smaller format stores are struggling for relevance against the large range, more competitively priced and more conveniently located larger format stores.

The report states that following the collapse and subsequent restructuring of Retravision and Betta Electrical, a growing number of stores have moved to larger buying groups or closed altogether and that this effect is particularly pronounced in Qld and NSW.

The report finds that redeploying of market share strongly favours Harvey Norman (HVN) and JB Hi-Fi (JBH), allowing them to further increase their buying power, and in the case of JBH provide support for new store rollouts. Credit Suisse said that they expect the trend to continue over the medium term.

Credit Suisse also believe the restructuring process currently being undertaken by Retravision is an indication of the economic pressures the buying group is now under and they do not see reason for this trend to abate in the near term.
In response to the changes in the sector, Credit Suisse have updated their valuations for recent market movements.

Their 12-month target price for HVN has been increased to A$5.45 from A$5.25 and they also increased their 12-month target price for JBH to A$9.38 from A$8.90.

Credit Suisse stated in that report, “As for HVN, the recent above-expectations third quarter 2007 comparable sales growth of 10.8 per cent is indicative of the benefits flowing from consolidation. Considering this enhanced degree of profitable revenue growth opportunities, we expect that HVN will further increase its franchising margins (anticipated to be 5.31 per cent in FY08) as profitable franchisees are harvested and the need for franchisee subsidisation declines. We are also of the view that scope for extracting operating leverage is much higher than the previous cycle for HVN.”

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