Initiation: March 10, 2017
J Capital Research ("J Cap") is an investment advisor to private funds. J Cap has analyzed the Australia.-listed company Harvey Norman Holdings Ltd. (“HVN”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. Some of our clients may be short shares of HVN, and, for this reason, there might be a conflict of interest.
We estimate that Harvey Norman (HVN) is overstating revenue from franchisees by about AUD 150 mln per year, or 8% of consolidated revenue. That money comes straight off the bottom line and would mean a 30% overstatement of profit. In poor years, the overstatement may have reached 50% of profit.
HVN was a pioneer in big-box retailing and property development and grew spectacularly until the early 2000s when internet and other competition started to bite. We believe that the company reacted starting in 2004 by manipulating financial statements. In
that year, HVN increased franchise fees by 66%, or from 9% to 15% of franchisee gross sales, and began a program of “tactical support” to franchisees to make up the portion of the fee that the struggling affiliates could not pay. What may have started as a temporary adjustment to smooth a rough patch stayed in place, as the business went into structural decline.
Profit Ported off the Balance Sheet
If our analysis is correct, the excess “profit” reported is ported off the balance sheet as phantom property investments and receivables from franchisees. Overstatement of assets since 2002 may have been in the range of AUD 1.6-1.7 bln.
We believe that most HVN franchisees are breakeven or loss making. An industry shock like a property downturn or challenge by an internet competitor like Amazon could crush margins and send franchisees and HVN stores out of business.
April 10, 2017: Failed Retail Locations. Download.
September 21, 2017: Black Holes in the Annual Report. Download
October 11, 2017: Delaying the Day of Reckoning. Download.