ACCC baiter, Gerry Harvey, has been put under the microscope over his 2003-04 financial results and our retail expert is fascinated by what he’s found.

He’s not high on the list of most loved at the ACCC but without doubt Gerry Harvey’s Harvey Norman retailing group is one of the most fascinating companies in this country. The complexity of its accounts, income streams and where that income comes from makes the much bigger Woolworths and Coles Myer seem staid and conservative by comparison.

Not that there’s anything hairy or risky about Gerry’s business. It’s just that he’s built a structure (along with his wife Katie Page and finance director John Skippen) that sees money flowing from different industries, different parts of the retail chain, and from non-retailing businesses such as share trading financial services and property development and dealing.

Some of these are businesses Coles Myer and Woolies have abanonded or not entered, or outsourced the operation to someone else. As well there’s also a tinge of property trust in the way the final dividend of 4.5c a share has been constructed.

But first the result. The company Tuesday reported earnings before interest and tax of $269.3 million, up 15% on revenue of $1.83 billion. The dividend was lifted to 7.5c a share from 5c a year ago, but Gerry’s being a bit tight-fisted as that payout is less than 50 per cent of basic earnings per share of 16.65c per share.

That’s the nitty gritty of the result which is not all that bad. Gerry and his lads in Australia, New Zealand, Singapore, Slovenia and Ireland, clearly had a good year. So too did Rebel Sport, which is a partly-owned subsidiary. The boom in electrical goods, such as plasma TVs and the like has clearly helped Harvey Norman.

But that’s the surface part of the result, the bog standard look at the outcome of another big year for Gerry and those around him. If you read the company’s announcement, you will gradually discover that Gerry Harvey’s creation is and isn’t a retailer, although it does sell a wide range of white and brown goods, home furnishings and softgoods.

If you had to define it, it’s a franchisor, with a retail business comprising around one third gross revenues. Much of that is sold through 157 franchised complexes in Australia. At the end of the 2004 year the company had a total of 179 franchised complexes and owned stores in Australia, New Zealand, Singapore, Slovenia and Ireland. Several new outlets have opened since June 30.

Harvey Norman owns or has an interest in the stores in New Zealand, Singapore, Slovenia and Ireland. They generated $430 million in sales in the year to June compared to $270 million in 2003. Sales by Harvey Norman franchised stores, which included Domayne, totalled $3.24 billion, up from $2.90 billion in 2003. These are not included in the result.

Total revenue for the parent company was just over $1.83 billion, made up of $1.156 million in retail store sales and more than $670 million from other sources. It’s that figure that contains the key to Harvey Norman’s fortunes and its growth.

If you go to page 20, “Statement of Cash Flows” you see that Harvey Norman generated a massive $568.16 million from its franchises in the year to June, that was $252.12 million or 80% above the $316 million for 2003. Put anther way that’s almost half the revenue from company-owned stores. And much of it profit!

Payments to suppliers and employees jumped by $342 million or 31%, a sign of growing sales and expansion. On page 19, there a line for “marketing expenses” given as $209.9 million in the year to June, compared to only$38.28 million a year earlier.

But on page 22 there is this explanation: “The majority of the increase is attributable to revenue derived by Generic Publications Pty Limited (GPL), a wholly owned subsidiary of Harvey Norman Holdings Limited, in respect of Harvey Norman brand advertising published by GPL. GPL is an accredited media placement company.

Franchise fees, rent received from franchisees and asset usage fees have increased as a result of the opening of nine new franchised stores.

Franchisee trade creditors have also increased from the previous year producing a net cash inflow. This increase in franchisee trade creditors, the opening of nine new franchised stores, coupled with improved trading conditions of existing stores, have resulted in an increase in overall net receipts from franchisees.

The increase in receipts from customers can be directly attributable to an increase in sales revenue from company owned stores in New Zealand, Slovenia, Ireland and other controlled entities.

The increase in payments to suppliers and employees is due to increased payments made for inventory and operating expenses by company owned stores and other controlled entities driven by an increase in sales by those entities. Further, included in the current year cash outflow are advertising expenses paid by GPL.

The revenue and income segment breakdown give the fullest picture. Franchises and corporate revenue totalled $509.6 million. Retail revenue $1.229 billion, property development $98.82 million, financial services $8.161 million and share trading $1.622 million.

Retail revenue from New Zealand, Rebel Sport, Slovenia, Ireland add another $151 million in sales to other non-franchised retail. That totalled $1.15 billion. The retail business also generated another $70 million in sales from outside the group, making total company owned retail sales of $1.229 billion. That gave a total revenue figure of $1.83 billion (there were some eliminations so the above figures do not add up).

Income by segment gives a similar picture. Earnings before interest tax and depreciation of $227.74 million for franchise and corporate, or more than 50c in the dollar. (An amazing margin and as I said before, the key to the profits of Harvey Norman). Retail had EBITDA of $81.45 million, or a margin of 6.6%, not huge, but not bad for this sort of business.

Property though had the fattest of all in terms of margin, EBITDA of $64.66 million, or around 66%. Financial Services returned $3.67 million, or a margin of 45%. And share trading returned a gross profit $1.16 million.

Franchise and corporate earnings rose sharply from the 2003 figure of $151.3 million, retail was up from $49.47 million, property more than doubled from $28.8 million, financial services were about steady at $3.7 million and share trading had a $78,000 loss.

The franchises are clearly the key to the success of Harvey Norman and the wealth of Gerry Harvey and his wife and other big shareholders. Gerry always says that the successful prosper with him.

But none are quite as successful as Gerry and the others at the top of the chain. If you take the net receipts figures on page 20 the $568 million from franchises represented around 17% of total franchise sales of $3.24 billion.In 2003 receipts from franchises of $316 million represented 11% of franchise sales of $2.9 billion. An extra $252 million flowed to Harvey Norman in the year from franchises, while sales jumped by only$340 million, according to the company’s payments.

Nine new franchised stores may have opened and explains this big rise, as the annual report says. But it would be a worry because all franchising operations eventually hit a natural limit to growth. Gerry Harvey remains confident this won’t happen, but it has to be in the back of investors’ minds.

Finally, 1.5c of the final dividend of 4.5c a share comes from a property revaluation that lifted property by $70 million in the year. That adds an element of property trust to Harvey Norman and completes a fascinating if not somewhat complicated picture.