Closing down (short) sales, now on
08 August 2017
The demise of the retail sector may not be inevitable, but if it is to recover, there is a lot to do and a long way to go, says David Lewis of FIS Global
Image: Shutterstock
The rise of internet shopping has been impossible to miss. Shoppers, from millennials to silver surfers, are increasingly purchasing goods online rather than visiting brick and mortar stores. Unlike the sudden impact of the financial crisis, bringing down major financial institutions almost overnight, the decline of the traditional retail market has been a slow degradation as tastes and habits change.
However, two things stand out when you look at the data behind the health of the retail market, particularly in the world’s largest economy. Firstly, the pace of decline is increasing and, secondly, no opposing force is coming to the market to turn back the clock and save the industry. Could the inexorable decline of the retail sector be the biggest shorting opportunity to come along since the sub-prime mortgage markets?
Short sellers have held positions in the flagship department stores of Sears and JCPenney for a long time, and made handsome returns. Figure 1 shows the borrowing volumes, taken here as a proxy for short interest, of both companies as well as the utilisation levels showing the proportion of available shares that have actually been borrowed. All values are indexed to 100 as of July 2015, showing two years of change.
Short sellers had already taken down some 90 percent of the Sears shares available in July 2015 and, as of June 2017, this value had fallen slightly to 83 percent. Over the same period, the company share price had fallen from $21.44 apiece to $8.97, a fall of some $12.47 or 58 percent. With an average of more than 12 million shares being borrowed over that period, this translates into a gross return of more than $150 million for short sellers. Over a longer period, the impact of Sears’s inability to defend itself from the online stores is even more striking. Five years ago, the Sears share price was $44.67, making an 80 percent decline in value over that period. According to some, bankruptcy is looming for this household name that has been in business since 1886.
For JCPenney, the story is not quite as catastrophic. Two years ago, the company shares were trading at around $8.24, but are now worth a little over $5.40, representing a decline of 34 percent. However, over five years, the net decline from the heady levels of $28.80 per share is, at 81 percent, almost identical to Sears. Short sellers have been a little less aggressive with JCPenney, holding, on average over the last two years, some 77 percent of the available shares to support their short sales. With an average of more than 68 million shares borrowed over the last two years, however, the gross returns for short sellers appear to exceed those held against Sears at more than $190 million.
Sears and JCPenney do not tell the whole story, of course. The Amazon effect is casting its shadow over the brick and mortar retail industry as a whole. The health of the consumer marketplace in the US has been reasonably strong over recent years, aided by low interest rates. But multiple factors are now coming into play, which could be turning that dramatically around. In 2017 so far, 76 million square feet of retail space in the US has been closed down. To put that into context, 2016 saw closures at an eight-year high of 82.6 million square feet. Some estimates suggest the 2017 total could be as high as 147 million square feet.
This is, of course, not just about buildings. So far, this year, the US retail sector has, on average, lost 9,000 jobs per month, according to the Department of Labor statistics, compared with an increase of 17,000 jobs a month in this sector during 2016. It is not difficult to see the reason behind this trend, when you consider online stores employ an average of 0.9 people per $1 million of annual sales in comparison with brick and mortar stores, which need 3.5 people. Job losses, with the inherent loss of income affecting other industries and house values, plus vast tracts of shuttered retail space in towns across the US start to look like the beginning of a dystopian nightmare. Cities reliant on retail industries will be looking warily at the impact that the decline of the automobile industry has had on Detroit.
A building boom in previous years has created the retail space and capacity not seen elsewhere in the world. In the US, there is 24 square feet of retail space per person, with the next largest allocation being Australia at 11 square feet. Europe, by comparison, has a measly 2 to 5 square feet per person. The explosive expansion of retail buildings in the US has left developers, mall owners and chain stores heavily indebted. Stores that are shutting down are not being replaced as shopping preferences move online. As a result, it is not just shares in the stores themselves that will come under scrutiny from short sellers, but also the shares and corporate debt of the associated industries that rely on accommodating and servicing these stores.
Food retailers had considered themselves relatively immune from the pressure on old-fashioned department stores that appeared to be unable to meet the needs of the modern consumer. The purchase of the Whole Foods grocery chain by Amazon earlier this year has changed that as it strives to move staples and fresh foods to the digital world, showing traditional retailers that it is not just about price and choice. They are battling a systemic change in buying behaviour, with new shoppers being much more comfortable with buying everything online and expecting it to be delivered to their doorstep.
Online shopping only accounts for 10 percent of consumer spending in the US, so while its impact is increasing, online stores do not yet have it all their own way. The demise of the retail sector may not be inevitable, but if it is to recover, there is a lot to do and a long way to go. And if there is one thing they do need to learn, it is that today’s shoppers don’t like going far from their mobile devices to shop.
Figure 1: Short interest and utilisation indexed to July 2015
Source: FIS Astec Analytics
However, two things stand out when you look at the data behind the health of the retail market, particularly in the world’s largest economy. Firstly, the pace of decline is increasing and, secondly, no opposing force is coming to the market to turn back the clock and save the industry. Could the inexorable decline of the retail sector be the biggest shorting opportunity to come along since the sub-prime mortgage markets?
Short sellers have held positions in the flagship department stores of Sears and JCPenney for a long time, and made handsome returns. Figure 1 shows the borrowing volumes, taken here as a proxy for short interest, of both companies as well as the utilisation levels showing the proportion of available shares that have actually been borrowed. All values are indexed to 100 as of July 2015, showing two years of change.
Short sellers had already taken down some 90 percent of the Sears shares available in July 2015 and, as of June 2017, this value had fallen slightly to 83 percent. Over the same period, the company share price had fallen from $21.44 apiece to $8.97, a fall of some $12.47 or 58 percent. With an average of more than 12 million shares being borrowed over that period, this translates into a gross return of more than $150 million for short sellers. Over a longer period, the impact of Sears’s inability to defend itself from the online stores is even more striking. Five years ago, the Sears share price was $44.67, making an 80 percent decline in value over that period. According to some, bankruptcy is looming for this household name that has been in business since 1886.
For JCPenney, the story is not quite as catastrophic. Two years ago, the company shares were trading at around $8.24, but are now worth a little over $5.40, representing a decline of 34 percent. However, over five years, the net decline from the heady levels of $28.80 per share is, at 81 percent, almost identical to Sears. Short sellers have been a little less aggressive with JCPenney, holding, on average over the last two years, some 77 percent of the available shares to support their short sales. With an average of more than 68 million shares borrowed over the last two years, however, the gross returns for short sellers appear to exceed those held against Sears at more than $190 million.
Sears and JCPenney do not tell the whole story, of course. The Amazon effect is casting its shadow over the brick and mortar retail industry as a whole. The health of the consumer marketplace in the US has been reasonably strong over recent years, aided by low interest rates. But multiple factors are now coming into play, which could be turning that dramatically around. In 2017 so far, 76 million square feet of retail space in the US has been closed down. To put that into context, 2016 saw closures at an eight-year high of 82.6 million square feet. Some estimates suggest the 2017 total could be as high as 147 million square feet.
This is, of course, not just about buildings. So far, this year, the US retail sector has, on average, lost 9,000 jobs per month, according to the Department of Labor statistics, compared with an increase of 17,000 jobs a month in this sector during 2016. It is not difficult to see the reason behind this trend, when you consider online stores employ an average of 0.9 people per $1 million of annual sales in comparison with brick and mortar stores, which need 3.5 people. Job losses, with the inherent loss of income affecting other industries and house values, plus vast tracts of shuttered retail space in towns across the US start to look like the beginning of a dystopian nightmare. Cities reliant on retail industries will be looking warily at the impact that the decline of the automobile industry has had on Detroit.
A building boom in previous years has created the retail space and capacity not seen elsewhere in the world. In the US, there is 24 square feet of retail space per person, with the next largest allocation being Australia at 11 square feet. Europe, by comparison, has a measly 2 to 5 square feet per person. The explosive expansion of retail buildings in the US has left developers, mall owners and chain stores heavily indebted. Stores that are shutting down are not being replaced as shopping preferences move online. As a result, it is not just shares in the stores themselves that will come under scrutiny from short sellers, but also the shares and corporate debt of the associated industries that rely on accommodating and servicing these stores.
Food retailers had considered themselves relatively immune from the pressure on old-fashioned department stores that appeared to be unable to meet the needs of the modern consumer. The purchase of the Whole Foods grocery chain by Amazon earlier this year has changed that as it strives to move staples and fresh foods to the digital world, showing traditional retailers that it is not just about price and choice. They are battling a systemic change in buying behaviour, with new shoppers being much more comfortable with buying everything online and expecting it to be delivered to their doorstep.
Online shopping only accounts for 10 percent of consumer spending in the US, so while its impact is increasing, online stores do not yet have it all their own way. The demise of the retail sector may not be inevitable, but if it is to recover, there is a lot to do and a long way to go. And if there is one thing they do need to learn, it is that today’s shoppers don’t like going far from their mobile devices to shop.
Figure 1: Short interest and utilisation indexed to July 2015
Source: FIS Astec Analytics
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