The Short Perspective: Forthcoming US Retail and Food Earnings

The earnings season is drawing to a close but there are still a few retailers, food and solar companies due to report this week, which see interesting investor sentiment. We look at Campbell Soup Company (NYSE:CPB), Krispy Kreme Doughnuts (NYSE:KKD), DSW, Inc (NYSE:DSW), Collective Brands (NYSE:PSS) and GT Solar (NASDAQ:SOLR).

Campbell Soup Company is expected to report third quarter earnings this week. Ahead of the announcement, the soon-to-depart CEO, Doug Conant confirmed the company is “having a challenging year,” and hinted at a change in marketing strategy in an interview published by the Wall Street Journal. Short sellers have been consistently building their positions in the stock over the past year from 2% to a high of 6.5% of total shares outstanding on loan. Although the share price has jumped ahead of earnings, there has been little change in short interest. Currently 40% of the total lendable supply is out on loan.

Campbell Soup is not the only favored food manufacturer amongst short sellers. Krispy Kreme Doughnuts has also seen a build up of short interest. The percentage of stock on loan increased since December, when the share price reached a three year high, from 1.5% to 4.5%. That said, the shares still trade at only a quarter of what the IPO price was back in 2000. The doughnut chain has been performing consistently well, reporting its sixth consecutive quarter of same-store sales growth last spring, a time when most restaurant companies have posted falls in sales, reports the Wall Street Journal.

Specialty footwear retailer, DSW Inc. will report first quarter earnings. The stock has been performing outstandingly well with share price recently reaching a new annual high. Despite bullish sentiment from the market, short interest has reached an annual high at 14% of the total shares outstanding on loan, which represents almost three quarters of the supply of shares that can be borrowed.

Elsewhere in retail, the share price of Collective Brands has decreased ahead of first quarter earnings later this week. Short interest has increased to over 12% of the total shares outstanding on loan, which contrasts against the low of 8% recorded this time last year. This bearish sentiment is at odds with long only institutional investors who lend. They have increased their holdings by 20% since the start of the year.

Finally, shares in GT Solar are trading at annual highs ahead of its fourth quarter earnings announcement. Short interest has been closely tracking the share price and stands at an annual high of 14% of the total shares outstanding on loan. An increased rate of short selling activity of late has resulted in almost 50% of the total lendable supply currently out on loan.

In securities lending this week, the biggest news was that a compromise agreement was finally thrashed out by the European Commission banning the naked short selling of shares and sovereign bonds. However, the Associated Press noted it did not extend to short selling of sovereign CDS, much to Germany’s annoyance, following actions by the UK as well as some peripheral markets such as Poland to vote against the CDS provisions. An additional concession means that short sales can take place on the provision that traders have a reasonable expectation of quickly obtaining the underlying asset. This extends well beyond the original proposal of only one working day. Credit should go the education efforts undertaken by industry bodies such as AIMA and ISLA, but the agreement still requires ratification by the European parliaments. For more on this, our video includes an interview with Roy Zimmerhansl, Principal at Fin Tuition.

Finally, we’ve been flagging for some time that retailers dominate the list of most shorted FTSE stocks and were surprised that this has not translated into the property sector, which is heavily exposed to the high street. Our analysis proved popular with FT and Bloomberg.