It’s no
wonder there was a colourful but soft look at
Harvey Norman’s power couple, Gerry Harvey and wife and Managing Director, Katie Page on the Nine Network’s Business Sunday.

With
the share price again under pressure after an indifferent 2005 that produced a
small drop in profit and poor results from inside Australia, the focus of the Business Sunday story
was on the company’s expansion plans in faraway Slovenia.

At Harvey Norman, earnings before interest and tax rose a derisory
$304,000 to $269.65 million, but fell on an after tax basis 2.6% to $171.44
million, a poor result on sales which rose by 10.6% on a gross basis and 5.3% on
a same store basis. The shares fell 12c Friday to $2.58

After this result in the key Australian business, you’d be looking for
some commentary from Gerry Harvey on how he planned to reverse these
trends. Zilch! There was no discussion of how the company, particularly
Gerry Harvey and his CEO, plan to improve returns from the franchised
operations in Australia that remain the heart of the company’s
business, its biggest source of sales and profits.

Under the franchise model for the 169 store complexes in Australia
covering Harvey Norman, Domayne and Joyce Mayne centres, Harvey Norman’s income is derived from fees and other charges the
franchisees pay Harvey Norman. And naturally, as
sales growth has slowed – as competition gets tougher and prices drop in the audio
visual and computer sectors – growth in these streams of gold has slowed.

So it’s
no wonder Harvey and his wife were talking glowingly about Slovenia and
other expansion plans in the company-owned business on Business Sunday and in
Friday’s annual profit statement.

The
company’s 2005 profit statement has lots of details on expansion off-shore. But there’s very little about Australian operations. Apart
from the first of the new so-called convergence stores at Castle Hill in
Sydney which will flog “converging” Information
Technology and Audio Visual products, there’s no detail on expansion plans in
Australia except for these two bald
paragraphs:

“In
Australia, the roll-out program for
Harvey Norman, Domayne and Joyce Mayne complexes will continue.

“The new Harvey Norman concept store at
Castle Hill, including the inaugural Audio Visual / Information Technology (AV /
IT) convergence concept, will open in November 2005.”

The profit
report says the company will generate higher franchisee fees from new store
openings, but apart from the new Castle Hill store, there was no other detail,
unlike previous years when the planned number of new stores within
Australia was given, with locations
in some cases.

This silence gives support to rumours in retail circles that Harvey Norman has decided to
slow Australian store openings dramatically because the growth of the past five
years has dropped because the market is saturated.

The extent of the problems can be seen from
segment information in the report: franchisees paid Harvey Norman $577,298
million in revenue in 2005, mostly in fees, rent and interest. That was up from
$509.6 million. That generated pre-tax earnings of $171.09 million, up less than
three million dollars from 2004.

In contrast earnings from the company owned
retail businesses such as Rebel,
New Zealand,
Ireland and
Slovenia
rose $8 million or so to $62.5 million on a pre tax basis. A better growth rate but still much less than the earnings from
franchisees.

With 169 franchised businesses in Australia Harvey Norman is facing
difficulty finding good new sites and this is occurring as consumers
slash spending, and prices for things like high margin plasma TVs and
LCD screens plunge.

Suddenly it has become much easier to
expand overseas than concentrate on Australia.