Is Harvey Norman Holdings Limited (ASX: HVN) more a retailer or a property stock? That's a question many may have after its chairman Gerry Harvey defended the way it values its property assets in the Sydney Morning Herald.
The debate over this thorny issue hasn't hurt the Harvey Norman share price. The HVN share price is up 0.5% to a more than one year high of $4.04 in morning trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is gaining 0.6%.
In contrast, the JB Hi-Fi Limited (ASX: JBH) share price rallied 1.5% to $25.32, the Breville Group Ltd (ASX: BRG) share price jumped 1.2% to $16.47 and the Nick Scali Limited (ASX: NCK) share price is up 1.9% to $5.78.
Black-box retailer
Trying to value Harvey Norman has also been a tricky question in my mind. Unlike most other retailers, Harvey Norman owns properties which is leased out to franchisees, and the value of its properties has a big impact on its reported profit.
It's like merging Bunnings owner Wesfarmers Ltd (ASX: WES) with BWP Trust (ASX: BWP), which owns the properties that Bunnings operates from.
There's a good reason why many listed retailers prefer to be tenants. It makes valuations a lot more transparent.
Harvey Norman doesn't help itself by not detailing how it values its properties. It only states that one-sixth of its $2.9 billion property portfolio is valued by external valuers and the rest by the its directors every six months.
More questions than answers
We have no idea which properties are valued by whom and whether the properties are picked each time at random to ensure there's less chance of bias.
While no one is suggesting that Harvey Norman isn't accurately reporting property values, the arrangement can introduce bias and conflicts of interests.
Mr Harvey works with a 30-strong internal team to value the properties and once he is in agreement with the valuation his team presents, he forwards it on to the board for approval, according to the SMH. Doesn't sound like a system with many counterbalances if you ask me.
Foolish takeaway
The upside from Harvey Norman's conglomerate structure is that it provides some level of diversification to the group.
Furniture, electronics and white goods retailers are facing challenging times with the slump in the residential property market. Household formations are a big driver of sales growth for this sector.
But buying shares in Harvey Norman is more akin to gambling than investing because I can't easily ascertain fair value for the stock.
There are better retailers to invest in, in my view.
