Report Card: Harvey Norman snubs investors

By David McEwen

Friday 7th June 2002

Many international annual reports are superior to New Zealand ones because they have more stringent disclosure requirements, forcing them to provide useful information to stakeholders.

Sometimes they look better too because their design budgets are substantially larger.

However, in all countries there are companies that treat their stakeholders as intruders into the efficient running of a business. Their information needs are ignored and they are expected have blind faith in the board and management.

Last year I had a bit of a dig at The Warehouse Group over its report. One comment was that the report was "just like its stores; plain, red and cheap." Another was that photos were of poor quality and text was laid out "in an unrelenting wall of grey, two columns to the page, unencumbered by fancy graphics."

However, by comparison with fellow Australasian retailer Harvey Norman, it is a paragon of disclosure and design excellence.

Like The Warehouse, Harvey Norman is fanatical about minimising costs and its annual reports reflect this. Its current one is printed entirely in monochrome, except for a splash of red spot colour on the cover. The only photograph is a head and shoulders picture of chairman Gerald Harvey and there are no illustrative graphs or tables to lift the pages.

This alone is no crime; many a less profitable and efficient company has hidden behind lavishly illustrated reports.

Where Harvey Norman really fails, and by comparison The Warehouse succeeds, is in the extent to which it voluntarily discloses information. Harvey Norman's is by far the worst example of corporate reporting I have ever seen for a company of its size. It may meet regulatory requirements but certainly no more.

Mr Harvey's chairman's report to shareholders is next to useless.

All it covers are the company's revenues and sales figures, the value of its properties, equity value, dividends and the location of recently opened stores. Apart from these 10 skinny paragraphs there is nothing that tells the company's owners about what the business does, the sectors in which it operates and the causes of its success, challenges, management, finances, hopes, fears or dreams. This is particularly significant because there is no managing director to give a report.

In other words Harvey Norman has ignored the needs of its owners in what is traditionally the most important and effective form of communication with them.

Contrast this with this column's comments that The Warehouse managing director Greg Muir's review is "a clear and informative description of the business and its opportunities and challenges."

There is also an extensive "triple bottom-line summary report," several pages of text devoted to the company's divisions and an impressive 10-year performance review, "chock full of useful ratios and statistics."

Harvey Norman is a wasteland by comparison, with none of these features.

Readers whose hopes might be raised by a subsection in the report headed "likely developments and future results" will quickly find them dashed. The text stretches to one sentence: "The directors have excluded from this report any further information on the likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years, as the directors believe that it would be likely to result in unreasonable prejudice to one or more entities in the consolidated entity."

Apart from treating readers with disdain, it hardly seems likely the company will keel over by disclosing a few details about its operations - that its competitors are no doubt already familiar with.

Many investors might be tempted to rule out such an unwelcoming company except that it has been a phenomenally successful business. Even though its latest result to June last year showed a dip in net profit, its return on equity was still a handsome 17.7%.

However, its share price has tumbled lately, apparently in sympathy with a troubled Australian retailer, Coles Myer.

There is little logic for this as Harvey Norman is far from troubled and brokers have raised their earnings expectations in recent months, while they have reduced Coles Myers'. Meanwhile, The Warehouse share price continues to rise.

Perhaps poor communication with investors is to blame for their lack of enthusiasm for Harvey Norman shares.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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