Two of Australia's biggest retailers, Harvey Norman Holdings Limited (ASX: HVN), and JB Hi-Fi Limited (ASX: JBH) are being heavily bet against by short sellers.
According to ASIC's latest daily short report, 10.4% of Harvey Norman's shares are held for short sale, while 13.3% of JB Hi-Fi is short sold. These figures make both companies among the most heavily targeted companies in Australia, outstripped only by Myer Holdings Ltd (ASX: MYR) at 14.2%, and Syrah Resources Ltd (ASX: SYR) at 19.9%.
Harvey Norman and JB Hi-Fi shares have each fallen more than 20% in the past 12 months as investor negativity takes hold. I was surprised yesterday to see that JB Hi-Fi is actually more heavily short-sold than Harvey Norman, because JB has historically been a significantly better performer.
Harvey Norman also seemingly has a target on its back in the wake of its Chairman's recent attacks on short sellers. There could be one very good reason shorters prefer to target JB Hi-Fi, however – and that's debt.
Following its acquisition of The Good Guys last year, JB Hi-Fi carries $486 million in net debt, and has net tangible assets of minus $1.44 per share (it owes more debt than the value of its assets). This is because JB Hi-Fi leases its stores, and does not own much in the way of tangible assets like property.
Ordinarily this is a shrewder way to operate, because it requires less capital to open a new store, which means the company can grow faster. However, in the event of business weakening, for example when Amazon enters Australia, it also means that there isn't much underpinning JB's value if its sales collapse.
By contrast, Harvey Norman has $640 million in net debt, but $2.68 per share in net tangible assets (current share price: $3.98) which gives some flexibility in the event of a downturn.
For bearish investors who are expecting Amazon to have a similarly negative impact on Australian retail as it does in the US, it's important to note that Harvey Normans' net tangible assets are not fixed. If retail sales collapse, the value of retail property will likely also plummet.
But hey, if you think that kind of collapse is going to happen, you shouldn't be buying either of these two businesses.
