Sportswear races ahead as Hedge Funds lose out

The age-old New Year’s resolution to get fit or lose weight seems to be holding strong as we head into February. Sportswear retailers are racing ahead of supply constraints, rising material costs and choppy consumer demand. We look at investor sentiment specialists including; Lululemon Athletica Inc (TSE:LLL) (NASDAQ:LULU), Under Armour Inc (NYSE:UA), Nike Inc (NYSE:NKE), IC Company A/S (CPH:IC) and Li Ning Co (HKG:2331).

Yoga-inspired sportswear retailer LuluLemon Athletica has surprised the market reporting that fourth-quarter earnings will beat guidance. The company is described by Bloomberg as a retailer that sells a lifestyle, a group they report is well placed to profit in the current economic climate. The shares have more than doubled over the past 12 months to USD 68 in the US listing, resulting in short sellers scurrying to cover their positions. Short interest reached a high of 14% of total shares outstanding on loan in the Canadian and US listings in October. It has since fallen in the US listing to 8% of total shares, but this remains significant as more than 40% of the lendable supply is still out on loan. The proportion of shares held by long only funds who lend, which can be used as a proxy for institutional ownership, has increased by 48% to 4 million shares since December. The same pattern is replicated in the Canadian listing.

US firm Under Armour, reported increased fourth-quarter earnings yesterday. The company has seen its share price double over the last year, matched by a doubling of short interest in the stock. The percentage of shares outstanding on loan peaked in September at 17.5%, however shorts have since covered their positions to 12.8%. Institutional ownership currently stands at 8.8 million shares, a fraction higher than holdings in January 2010.

Nike, the world’s largest manufacturer of sportswear and equipment, has defied the predictions of the short market too. Short interest increased last year from 3% to 5% of total shares outstanding on loan, despite the shares rallying. The level of short interest has held steady at 5% since October, possibly due to investors waiting for further insight on the future performance of the company. The Wall Street Journal cited Nike as an example of a retailer that “could face a less-than-happy 2011” after shares fell despite positive third-quarter results.

Mid-cap stock, IC Company, is a Danish ski and golf brand in which short sellers increased their positions to 0.9% of the total shares outstanding on loan. This accounted for 40% of the lendable supply in August, as the share price fell by DKK 90. A rebound in price forced short sellers to quickly cover their positions to 0.2% of total shares outstanding by the end of September.

Hong Kong listed Li Ning Co is pursuing its aim to penetrate the US market, relying on YouTube to market its brand. Short interest has built up over the last two quarters of 2010 from 4% to 11.2% of total shares outstanding on loan as the share price tumbled to HKD 14. The stock has been subject to some short covering since December, reducing short interest to 9.3%. Institutional investors consistently invested in the stock throughout 2010, although they have scaled back their holdings from 145 million to 115 million shares since November.

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