Retail: Have short sellers overreacted?

One wonders whether bearish sentiment shown by hedge funds towards UK retailers has been overdone? True, the British Retail Consortium revealed that sales in March fell by 1.9%, the worst monthly drop in retail sales since 1995 when it first started collating the data. But retailers now account for half of the top 15 most shorted stocks in the FTSE All-Share index. Stocks covered include: HMV Group plc (LON:HMV), Dixons Retail plc (LON:DXNS), Kesa Electricals plc (LON:KESA), Amazon.com, Inc. (NASDAQ:AMZN), Home Retail Group (LON:HOME), Mothercare plc (LON:MTC), Carpetright plc (LON:CPR), Debenhams Plc (LON:DEB), Marks and Spencer Group Plc (LON:MKS) and NEXT plc (Public, LON:NXT).

The average short across the FTSE All-Share is just under 2% of total shares outstanding on loan, yet “second tier” FTSE 250 retailers account for three of the top four most shorted companies with figures far higher than the average. Heading the list is HMV Group, with a whopping 23% of its total shares out on loan. The company has long been a favorite with short sellers who anticipated three profits warnings this year. Short interest was as high as 26% back in January, before falling back to 16% and it is clearly on the rise again. Yet against this backdrop, long only funds who lend have added 10% to their holdings this year.

Analysts at Morgan Stanley have been reported in The Telegraph saying that electrical retailers Dixons Retail and Kesa Electricals would be better off if they jettisoned their UK high street presence to focus on countries where they fair better. Dixons, which recently surprised the market with a profits warning followed by the news that it was pulling out of Spain, has seen its share price reach new lows. Short interest spiked in late March to 20% of total shares. Yet, institutional investors who lend added 20% to their holdings in January. Kesa Electricals has seen short interest treble to 9% of total shares in April, despite the shares coming off their annual high back in December.

Online giant Amazon has been the lead disruptor, forcing change on the business models of the retailers above. The company sees low levels of short interest at 1%, although the percentage of shares on loan has doubled since the end of March, perhaps reflecting some bearish sentiment ahead of results this week, despite a recent rally in the share price. However, long only investors who lend have added over 5% to their holdings over the same period, recouping lost gains.

The remaining retailers amongst the list of 15 most shorted UK stocks are Home Retail Group, Mothercare, Carptetright and Debenhams, which see the percentage of shares outstanding on loan at 19%, 12%, 10% and 9% respectively. Short interest in all of them remains close to annual highs.

Amongst the FTSE100 majors, Marks & Spencer sees the highest levels of short interest, which has doubled since the end of March to 6% of the total shares outstanding on loan. Next sees 6% of its shares out on loan, up 50% since the end of March.