/Wall Street revives US retail ‘big short’

Wall Street revives US retail ‘big short’

Wall Street is reviving a “big short” of the US retail sector ahead of a raft of earnings reports this week, even though earlier bets on a mall “apocalypse” have failed to pay off.

Bears last week staked out the most aggressive positions in a year against SPDR S&P Retail, the sector’s benchmark exchange-traded fund. The fund, known as XRT, was so heavily betted against that the short positions were about four times larger than shares in the ETF itself, according to data provider S3 Partners.

XRT, which tracks S&P’s equal-weighted Retail Select Industry index, is the most heavily shorted of any ETF in the country, according to State Street Global Advisors.

The shorts are back even though the US retail industry has so far defied fears of a collapse en masse at the hands of Amazon.

“If you were short the sector at the wrong time, you would have lost a lot of money,” said Stephen Ketchum, founder of Sound Point Capital, a hedge fund and collateralised loan obligation manager with $19.4bn of assets under management.

“But a lot of these retailers are in for a long secular decline. It’s unequivocal that the trend for purchasing online will continue to increase.”

Brad Lamensdorf, portfolio manager at Ranger Alternative Management in Dallas, said that while several companies in the sector were holding their own in the digital era, others had “horrendous” metrics. “There is obviously a very, very serious transformation occurring,” he said.

“There are also a lot of signs that the consumer is buckling,” he added, pointing to rising car loan delinquencies.

Retail stock prices have been volatile as investors try to understand how the sector is adapting to the rise of internet shopping. Some chains, including the world’s biggest retailer Walmart, are reporting strong sales figures, yet several including Payless ShoeSource and Gymboree have filed for bankruptcy this year.

Earnings this week are forecast to confirm financial pressures on companies including department store chain JC Penney, where annual net losses are forecast to widen to $300m, and L Brands, owner of Victoria’s Secret, where net income is set to drop more than a quarter.

But they are also expected to show how other companies are performing better. Annual net income is forecast to rise 17 per cent at the discounter TJX, and 44 per cent at the electronics specialist Best Buy, according to analysts’ forecasts collated by Bloomberg.

Investors who bet against XRT when short interest rose at the start of 2017 have lost out. The fund has gained about 5 per cent since then, although the performance has been volatile, with the fund up as much as 23 per cent but down as much as a tenth over the period.

Those who bet on the decline on individual companies have fared better, depending on which shares they shorted. Stocks that are down in the period include Rite Aid, down 90 per cent, Signet Jewelers, down 65 per cent, and Sears, which filed for bankruptcy last October.

Short interest in XRT, which dipped as low as 129 per cent of shares outstanding last September, has risen sharply since the new year and reached 453 per cent last week.