Harvey Norman's Interest Wanes

The Age

Wednesday May 14, 2008

Ari Sharp

THE days of interest-free finance periods stretching close to four years at Harvey Norman are numbered as the consumer electronics retailer seeks to rein in costs.

"The cost of doing those interest-frees is not cheap," company chairman Gerry Harvey told BusinessDay.

"We do 44 months (interest free), but that's too long. We can't afford to do that. From a customer's point of view, that's a very good deal."

The scaling-down of the company's interest-free offering is part of a broader effort to shave costs in response to the gloomy retail environment, which will also include cuts in the company's advertising budget.

Mr Harvey defended the generous credit terms the company had offered against accusations they had exacerbated consumer credit problems, along with credit card debt and home mortgages.

"That's the world we live in, and we might say people have overcommitted, and a lot of people do, but that's the way they are. Some of us don't and some of us do," he said.

Harvey Norman yesterday released sales figures for the first four months of the year that showed comparable store growth of 2.5% compared with the same period last year for its stores in Australia, New Zealand, Ireland and Slovenia.

The company declined to release results specifically for its Australian stores, which form the bulk of its business, but Mr Harvey said that without the other three countries the results would improve slightly.

Sales for the four countries for the period totalled $1.78 billion, up 6.4% on a year earlier.

While inflation across the Australian economy as a whole is running at 4.2%, a higher Australian dollar, combined with the general downward movement in computer pricing, meant some of Harvey Norman's product lines had experienced price falls.

Mr Harvey said higher interest rates and petrol prices had forced consumers to cut their spending, putting the squeeze on retailers. He predicted many retailers would turn to discounting and event-based promotions to keep the cash registers ticking over, and takeover activity in the retail sector was possible.

"If you're doing better than your competitors and things get really tough, then your competitors either disappear or you take them over," he said.

"It's starting to happen now. We've got retailers ringing us and saying 'would you be interested in taking a share in our business or taking us over?' That will accelerate in the coming months."

Deutsche Bank retail equity analyst Kristan Walker said that, while the 2.5% comparative store sales growth was below his expectation of 4%, the weaker performance had been quarantined to March.

"If you took March out of the mix, the business is actually tracking OK," he said.

"That's fairly consistent with what we're hearing from the broader retail sector. January was pretty solid, February was slowing, March basically stopped, and then people talk about April being a bit of a bounce and things tracking OK at the moment."

Harvey Norman is feeling the effects of consumer cuts to discretionary spending.

Last month, Westpac-Melbourne Institute data found consumers were 13% less likely to buy a major household item in March than they were a month earlier.

Retail sales data for March, released by the Australian Bureau of Statistics, showed a year-on-year decline of 4.8% in domestic appliances, and a 0.5% decline in domestic hardware and house-ware retailing.

Harvey Norman shares closed up 3?, or 0.8%, at $3.62.

KEY POINTS

? Gerry Harvey says his company can no longer afford the 44-month credit-free terms.

? He says those terms had not exacerbated consumer credit problems.

© 2008 The Age

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