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Harvey Sales, Profit Decline

1/30/2006 09:40:00 AM Eastern

Lyndhurst, N.J. — Custom CE installer and high-end retail specialist Harvey Electronics reported a drop in both fiscal year-end sales and revenue.

For the 12 months, ended Oct. 29, Harvey sales dropped 6.3 percent to $40.4 million, from $43.1 million the previous year. Comp-store sale declined 8 percent.

The regional nine-store chain, operating in the New York area, reported sales of $9.6 million for the three months, ended Oct. 29, down 7.2 percent from the $10.4 million recorded in the same period in 2004. Comps-store sales in the quarter declined 12.6 percent.

A brief look at its holiday quarter, including the months of November through January 2006, Harvey said it continues to see a slowdown in retail store traffic. Custom installation continues to be strong and the video business has improved, said the retailer, with unit sales increasing, offsetting additional price compression.

However, Harvey expects to see a decline in its audio business and an overall reduction in comp-store sales of between 9 percent and 10 percent in the first quarter, compared with the same three months the prior year.

Harvey, which reported its year-end financials on Jan. 27, about three months after the end of the reporting period, said it had a net loss of $830,343 for the 2005 fiscal year, compared with net income of $1.3 million the previous year. The loss was negatively impacted by reduced comp-store sales, $200,000 in pre-opening expenses for the new Bridgewater, N.J. store and a 54.3 percent increase in net advertising expenses.

In the three months, net loss was $284,459, compared with net income of $748,242 in the fourth quarter of 2004. Net income in the fourth quarter of 2004 was positively impacted by an income tax benefit of $977,000.

Gross profit margin for the 12 months increased to 41.7 percent, from 41.1 percent the prior year, due to a decline in the retailer’s overall video business, which generally has lower margins than audio and labor sales. This was offset by higher margin audio sales and additional labor income, wire and cable sales, which generate strong gross margins. For the quarter, gross profit margin improved to 41.4 percent, from a year-ago 40.9 percent.

Expenses for the year increased by about 2.9 percent, or about $460,000, compared with the previous year. Again, the company’s Bridgewater store and additional ad expenses contributed to this rise.

Although Harvey said it was encouraged by the continued growth of its custom installation segment — which accounted for 64 percent of net sales in the fiscal year ended last October, compared with 59 percent the prior year — its business was negatively impacted by a decline in retail store traffic and from reduced overall video sales.

Video business was off about 15 percent for the year, due to reduced CRT, DLP and DVD sales, as well as price compression, competition, key vendor product shortages and a 1 percent decline in flat-panel unit sales, said Harvey.

“We believe the slowdown was due to a deceleration of consumer spending as well as consumer fears that flat-panel television prices would continue to significantly decline, thus delaying the purchase decision,” said Franklin Karp, president/CEO. “Additionally, consumers’ uncertainties and confusion regarding current technologies continue to be problematic for the industry.

“The company has experienced flat-panel growth in larger-size plasma and LCD televisions, while reporting declines in smaller screen sizes,” said Karp.

“We do expect acceleration in flat-panel unit sales in fiscal 2006 as sales prices have declined substantially. Furthermore, we do not expect to experience additional significant price compression on these larger flat-panel televisions in fiscal 2006.”

For the fiscal year, Harvey reported category by category, net product sales growth for 2005 over 2004, excluding labor income, attributable to each of product segments. The largest category, television and projectors dropped from a 41 percent share to 38 percent, while audio components climbed from 24 percent, to 26 percent, and accessories moved up to 12 percent from 11 percent. Other decliners were mini audio shelf systems, down to 2 percent in 2005, from 3 percent, and DVD/DSS/VCR, down to 4 percent from 5 percent.

Increases were reported in furniture, 4 percent, to 5 percent, and miscellaneous 2 percent, to 3 percent. Both cable and wire and extended warranties retained the same share year-on-year, at 6 percent and 4 percent, respectively.

While Harvey has reported a decline in retail store traffic, it said its higher margin custom installation business had increased for the year as well as the fourth quarter, both in overall sales dollars and as a percentage of net sales.

Harvey said it continued its cost-reduction program in the fourth quarter and engaged a new advertising agency during this period. For the fiscal year, gross advertising costs remained the same as the previous 12 months, at $2.7 million, but net advertising expenses increased to $725,000 in the 2005 fiscal year, from $470,000 the previous period. Advertising percentage of net sales rose to 1.8 percent in the 12 months, up from 1.1 percent in 2004.

This current fiscal year, the retailer says it has a priority to more effectively market its brand and service offerings, while promoting home theater demonstrations, sales and installations, thus differentiating itself from the mass merchants.

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