Harvey Norman has sunk almost $62 million into a secret start-up in the past two years, a retail joint venture that hasn't earned the listed operation a cent so far.
In addition to the "commercial advances" to the mystery venture, investors have asked why the accounts for last financial year included a $11.56 million impairment against the start-up.
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Harvey Norman FY profit up 30pc
Retailer Harvey Norman has reported a 30 per cent increase in net profit on the back of Australia's strong appetite for housing and connected devices. Vision courtesy ABC News 24.
The retail empire's executive chairman Gerry Harvey said the so called KEH partnership was led by the retailer's former chief information officer Kaine Escott along with former franchisee Phillip Rohan.
The business is half-owned by Mr Escott and Mr Rohan as well as Harvey Norman Big Buys, the retailer's online-only, general merchandise platform that sells everything from plastic Star Wars figurines to massage chairs. Big Buys was originally launched as a "deal of the day" website but retail analysts claim it was also Harvey Norman's attempt to build a "mini Amazon".
Mr Harvey would not discuss any details of the start-up business, saying some things need to be kept confidential but he's confident it could be a big money spinner.
"It's a venture which we've invested a fair bit of money in already but ... if we pull this off it will be worth, $200, $300, $400 million," Mr Harvey said. "And if we don't, we'll lose about $50 million."
Mr Harvey said the auditors advised Harvey Norman to book an $11.56 million impairment in relation to the start-up, which was advanced more than $25 million last financial year.
Concerns over the business have surfaced ahead of Harvey Norman's annual general meeting on Monday and follow calls by proxy adviser, Ownership Matters for fund managers to vote down the retailer's accounts.
Ownership Matters claims Harvey Norman should consolidate its franchisee accounts with its group accounts and provide greater clarity in regard to the more than $943 million it "advanced" to franchisees in recent years.
The proxy adviser published a report querying the provision of more than $594.9 million in loans or "financial accommodation" to its 673 franchisees for unpaid fees, rent, interest as well as working capital and $348.5 million for funding inventory orders.
Ownership Matters said Harvey Norman had written off loans to franchisees to the value of $566 million since 2011, including $69 million in the so-called "tactical support" in the last year and yet none of these loans had ever been classified as overdue.
Ownership Matters co-founder Dean Paatsch said the consolidation of the accounts would give investors greater insight into the health of the entire Harvey Norman network. One critic of Harvey Norman's complex business structure said the $62 million advance to the start-up operation was consistent with the advances to the franchisees.
"It's symptomatic of a bigger issue, where Harvey Norman makes these financial advances, which may or may not be repayable and then they are free to write them off," he said, "I just put this in the category of one of Gerry's flurries."
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