The changing face of Retail
The era of low cost products from China, spanning the past 30 years is coming to an end according to Li & Fung Ltd (HKG:0494), one of the largest suppliers of Chinese goods to western retailers. The rising cost of raw materials and Chinese labor is resulting in manufacturers passing costs on to the retailers. We look at investor sentiment of Retailers as well as those featured in Li & Fung’s portfolio including; Gap Inc (NYSE:GPS), Abercrombie and Fitch, Kohl’s Corp (NYSE:KSS), Debenhams (LON:DEB) and Next (LON:NXT).
Li & Fung Ltd. has reported a 27% increase in net profit, boosted by its rapid expansion into the U.S. and European markets. They claim to be having to move away from sourcing products from China to countries such as Bangladesh and Vietnam. Some analysts argue that the rising prices will be positive for Li & Fung due to their commission based pricing structure. However, retailers are reducing the length of their sales contracts by up to three-quarters, inline with volatile commodity prices. Despite the falling share price, investor sentiment is positive as short interest has more than halved over the past six months to 0.4% of total shares outstanding on loan. Holdings of funds who lend, which can be viewed as a proxy for institutional ownership, also continue to grow.
US apparel retailer, Gap Inc, is reported to be closing down 200 of its 900 stores in the U.S and initiating a new repositioning strategy to restructure its signature look to allow it to focus on new product development. Gap increased retail prices of “several products” last months while higher cotton prices are also prompting several companies to use more man-made fabrics. Although, the share price is maintaining respectable levels including a recent rally, institutional ownership has declined gradually over the year by 25%. Short interest has been building up over the past quarter from 1% to 4% of total shares outstanding on loan. Investors will look to the March sales release due in early April to provide further insight to future performance.
Abercrombie and Fitch Co. shows no sign of slowing recovery as its shares have almost doubled in value, having fallen to USD 30 in August. The company’s strategy appears to be to aggressively expand its store count despite having to increase retail prices due to increasing costs of raw materials. Investors are bullish towards the stock. Short sellers have rapidly covered their positions, reducing short interest from 10% to 1% since October as the share price continued to rally.
Kohl’s Corp is due to report sales for March in early April. Although short interest is low at 0.5%, in comparison to peaks of 4% of total shares outstanding on loan recorded in December, institutional ownership continues to decline. The stock has seen a 15% fall holdings of large funds who lend over the past year.
UK retailers are less than optimistic following weaker than expected UK retail sales reported for February highlighted the risks of the slowing economic growth. The CEO of Next Plc reported that the sector will resemble “walking up the down escalator” and “will have to work hard to stand still”. Next Plc currently sees short interest standing still at 4% of total shares outstanding on loan since December. Department store, Debenhams currently appears as a regular feature of the Data Explorers screen for stocks reaching annual highs in short interest. Short interest has built up from 2% to over 8% of total shares outstanding on loan since August. More than 40% of the lendable supply is now out on loan. Interestingly, institutional ownership in both Next and Debenhams has been increasing over the past quarter by 20%.
