Harvey Norman reported FY25 PBT growth of 9% with much stronger growth of 19% in 2H25. Sales trends are strong at the start of FY26e, which bodes well for the year ahead. However, the company was lapping a weak result from a year ago. We forecast FY26e comp sales growth of 4.5% for Australia and 6.0% for New Zealand. With better sales, what profit margin upside can we expect? Given Harvey Norman’s margins are near long-term average and cost growth may rise in FY26e, we expect the operating leverage to be a little lower than usual. PBT margins may rise 70bp. We forecast group network sales growth of 6% and PBT growth of 18% in FY26e.

Harvey Norman reported 1H25 system sales growth of 4% and EBITDA up 4%. Sales trends have improved in absolute terms and relative to market in Australia. The company’s 1H25 result also indicates a better inventory position in Australia, which should support sales and profit margins. While all the key metrics look better for the company, its growth potential is still low in our view and increasingly based on offshore growth.

Breville reported 1H25 sales growth of 10% and EBIT growth of 11%. The result was characterised by strong sales across all geographies and particularly in coffee machines. We expect the company to sustain good sales growth, helped by a step-up in product development, marketing and the addition of new markets including China. 

Harvey Norman reported FY24 EBITDA down 11% with a drop in Franchising and New Zealand earnings and increase in its property earnings. The company has lost market share in both Australia and New Zealand over the past five years and its EBITDA margin recovery is yet to emerge. We expect New Zealand to remain a headwind in FY25e but Australian earnings should rise slightly. The quality of the FY24 result was low with reduced lease amortisation supporting earnings.

Australian retail has had a challenging 12 months. We expect we are past the worst for this sales cycle with a gradual improvement in growth over the next 12 months. We forecast retail sales growth of 2.9% in FY25e, up from 1.8% in FY24e. The sectors likely to see the strongest recovery are household goods, supermarkets and online. Some categories are still vulnerable to a correction in volumes such as liquor, cafes & restaurants and fashion. While there is an upswing, it will be mild and leave growth rates below trend for the next three years in our view given the low household savings rate and decelerating population growth.