Claims That Harvey Norman Is A Risk Investment Has Gerry Harvey Seething
Fund manager Sid Choraria, who came first in a competition aimed at identifying the world’s most-overpriced stocks, believes Harvey Norman shares will fall 35 per cent to 40 per cent over the next 18 months to two years.
Gerry Harvey has come out swinging at the suggestion after Choraria questioned the sustainability of Harvey Norman’s franchise structure, pointing out that franchisees paid little upfront capital and received a salary and a car – making them more akin to employees than franchisees.
This is not the first time that the Harvey Norman retail model has come under attack.
Gerry Harvey has accused Choraria of misunderstanding Harvey Norman’s business model.
“People go out on limbs to get publicity and they dig things up that get them publicity,” Mr Harvey told Fairfax Media.
“This guy is on a mission – we know where he’s coming from – and we are entitled to refute his allegations or ignore him.”
Mr Harvey defended Harvey Norman’s franchise structure, saying it had been in place for 30 years, had been key to the company’s growth and there was no reason to change.
“Because he sees it nowhere else he says it must be wrong,” he said
“With that model between 1987 when we went public (and 2007) we outperformed every other public company in Australia.”
Gerry Harvey confirmed that the retailer needed to refinance $370 million debt in December and said the company was currently in talks with financiers.
Mr Choraria, who works for Singapore-based funds management firm APS Asset Management, also raised concerns about Harvey Norman’s debt levels, its poor financial disclosure and losses in its international operations, particularly Ireland, which has lost money in eight of the past nine years.
“At $3.70, Harvey Norman seems to be priced for perfection at 48 times free cash flow, unlikely to be sustainable over the long term, given slowing growth and severe competition,” said his report, which came first place in a competition run by New York-based SumZero.
Fairfax Media said that the report echoes concerns held by many Australian fund managers and analysts, who have long lamented the lack of transparency in Harvey Norman’s accounts, its unique franchise structure and poorly performing overseas investments.
Harvey Norman increased tactical support to franchisees in the form of rent, marketing and franchise fee relief from $60 million in 2011 to a peak of $128 million in 2013 – an average of $152,424 for each franchisee.
Analysts said tactical support had fallen in 2014 as trading conditions improved and was likely to fall this year.
“It’s an interesting structure and everyone has their view but it’s been this way for years,” said one analyst, who did not want to be named. Mr Harvey also defended Harvey Norman’s balance sheet after Mr Choraria questioned the company’s strategy of relying on capital markets rather than cash flows for funding.
“The big picture is that our borrowings are 23 per cent of shareholders’ funds, which is very low by all standards,” Gerry Harvey said.
Mr Harvey said it was ‘no secret’ stores in Ireland and Northern Ireland had been losing money for years.
“We are very well aware of what we lose in Ireland – its public knowledge,” he said. “But the Ireland economy is now on the mend and Ireland is improving. At our last meeting we were hoping we’d achieve break-even in the year ended June 2016 – that’s our current budget.”