Harvey Norman's executive chairman, Gerry Harvey, has blasted a foreign short seller as the culprit behind "hearsay and rumours" that raised questions about the retailer's financial relationship with its franchisees.
"It has been started by a short seller ... he's been trying to disrupt our company," he told a packed shareholder meeting at the Sydney Tattersall's club on Monday.
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"I think they should be banned .. [they have] huge incentive to go out and damage the price."
The allegations were triggered by the retailer's latest annual report, which contained the surprise that it has loans totalling $943 million to its franchisees and had written off $566 million of those loans – what it calls "tactical support" – since 2011.
![Harvey Norman boss Gerry Harvey before the company's AGM at the Tattersall's club.](/web/20161117013623im_/http://www.brisbanetimes.com.au/content/dam/images/g/s/o/q/t/e/image.related.articleLeadwide.620x349.gsowc8.png/1479104421575.jpg)
Proxy advisor, Ownership Matters, recommended a vote against Harvey Norman's accounts. It also said the retailer should consolidate its franchisee accounts with its group accounts, and provide greater clarity in regard to this $943 million it "advanced" to franchisees in recent years.
"There are no franchise bad debts," insisted Mr Harvey.
After the meeting, Ownership Matters rejected Mr Harvey's short-selling conspiracy allegations and repeated its call for more transparency.
"The moment you bring franchisees' accounts on to your balance sheet, then you're not talking about whether debt has been forgiven, you are showing the health of the network because when the person walks out of the store that's a sale to you," a spokesman told AAP.
Other Harvey Norman directors offered the Australian Shareholders Association (ASA) assurances about this tactical support.
"We understand tactical support payments are temporary in nature and are expensed by Harvey Norman in the year that they are made. The franchisee takes this payment into revenue and uses it as they best see fit to running their business," said the ASA report about the meeting.
Mr Harvey also denied allegations of the retailer structuring its operations to minimise its tax bill.
"Harvey Norman pays every cent of tax it is obliged to pay," he said.
In the end, Harvey Norman's army of retail investors passed these resolutions with little sign of protest, although there was a sizeable protest vote against the re-election of veteran board member, David Matthew Ackery, and resolutions concerning amendments to its constitution.
The retailer may face other challenges, though.
Analysts have also expressed concern that Harvey Norman's earnings cycle may have peaked – which means franchisees may soon be back under the sort of pressure not experienced since the 2011 and 2012 financial years.
The amazing tailwinds that have underpinned the retailer's earnings in recent years will soon wane, according to Citi.
"Unique conditions converged across housing, interest rates, currency and competition which drove exceptional sales and profit growth in both FY15 and FY16. As seen in FY11 and FY12, this operating leverage works in both directions," said Citi.
As the team pointed out in the report, which has a "sell" recommendation on Harvey Norman, "operating leverage and subsequent reduction in tactical support has been a far more significant driver of margins over the last three years" than efficiency programs.
Harvey Norman increased tactical support to franchisees in the form of rent, marketing and franchise fee relief from $60 million in 2011 to a peak of $128 million in 2013.
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