Australian Retailer With Most Bear Bets Is Set to Face Shareholders

(Bloomberg) -- Harvey Norman Holdings Ltd. is poised to face shareholders this week in what may be a contentious annual meeting amid a weak domestic economy and questions about corporate governance.

One of Australia’s biggest retailers has been in the cross hairs of short sellers as it battles an economy expanding at its slowest pace since the global financial crisis. Bear bets make up about 20% of the company’s equity float, according to Australian Securities and Investment Commission data compiled by Bloomberg, making it the most shorted stock on the benchmark S&P/ASX 200 Index.

“Short sellers often target AGMs in the expectation of a financial or trading update that disappoints,” said Fiona Balzer, policy and advocacy manager for the Australian Shareholders’ Association. The retail market in particular “is pretty tough.”

It’s not all smooth sailing for short sellers, with Harvey Norman climbing 39% this year, outperforming the ASX 200’s 19% advance. Even though the performance this year has wiped out losses accrued in 2017 and 2018, none of the 10 analysts tracked by Bloomberg have a buy rating on the stock amid concerns about the value of its property assets and margin pressure emerging in Australia and New Zealand.

Australia’s blighted retail environment has attracted short sellers to Harvey Norman over the last few years, said Geoff Wilson, chairman of Wilson Asset Management. The stock’s 2018 plunge handed bears a win as they wagered that consumer shares would fall amid a housing downturn.

“Those that want to take a sector position will short Harvey Norman because it’s a large, liquid stock,” said Wilson, who owns shares in the company.

Chairman Gerry Harvey has railed against shorts in the past. He claimed in 2016 that short sellers were colluding against the retailer after it faced questions about its accounting. A 2017 report from short seller J Capital Research Ltd. also alleged the company overstated its franchisee revenue. The company didn’t respond to an emailed request for comment sent during business hours.

Defying Bears

Harvey Norman has been able to overcome the short bets in part thanks to its offshore presence and a growing property portfolio. Overseas retail sales revenue exceeded A$2 billion ($1.4 billion) for the first time in the year ended June 30, while comparable sales at franchised stores in Australia dropped 0.9%, according to the company’s full-year results. The retailer values its property assets at A$2.99 billion, compared with a total market capitalization of A$5.33 billion.

But the market might be too optimistic on the property segment, said Morningstar Investment Service analyst Johannes Faul. As more people shop online and eschew physical stores, the value of the properties will likely decrease, he said.

Harvey Norman will also face scrutiny of its governance as shareholders and advocacy groups push to add more independent directors and women to the board and scrutinize executive pay plans.

The retailer received a “first strike” on its remuneration report last year when 50.6% of voting shareholders opposed it at the annual meeting. If it gets a second strike on Wednesday, which would occur if at least 25% of the votes were cast against the plan, the board may have to put itself up for re-election.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Tim Smith, Naoto Hosoda

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