US retailing stocks deliver significant Q3 revenues
03 September 2019
Sam Pierson, director of securities finance at IHS Markit, breaks down the recent big market movements in Overstock.com and the retail sector
Image: Shutterstock
The challenges facing retailers are well known, with the shift to online shopping and changing consumer preferences weighing on legacy bricks-and-mortar shopping outlets. This has been a global phenomenon, though the denizens of US shopping malls have been particularly hard hit. Around 2010 Sears was the poster child for the perennially in-demand retail equity, delivering significant lending revenue that helped to offset the terminal decline in share price. More recently Overstock.com and Dillard’s have seen increasing borrow demand, which has put pressure on the supply of lendable shares and driven significant increases in lending fees.
In early July the fee for new Overstock.com (OSTK) borrows briefly exceeded 100 percent, the highest level since at least 2006. Then, as lending fees are wont to do, the marginal fee for new borrows declined from the peak, but only so much as required to meet the average fee for all borrows in the 50 percent area, the latter having increased on the back of re-rates as well. As shareholders and short sellers anticipate the digital token dividend (record date 23 September) and contemplate a Patrick Byrne-less OSTK, it’s no surprise the borrow availability is still tight and fees remain elevated.
Dillard’s (DDS) was a general borrow as recently as June, however, when active utilisation reached 85 percent on 7 June lenders were able to start pushing out new loans at higher fees. The ratio of the NYSE reported short interest to the number of borrowed shares reported to IHS Markit increased from 75 percent in mid-April to 100 percent on 11 June, reflecting a decline in prime broker’s ability to internally source shares for short sellers to borrow. The increased utilisation and perceived decline in prime brokerage internal supply, along with increasing borrow demand from short sellers, was the perfect recipe to drive special fees. The average fee for Q3 is 22 percent, suggesting shareholders could realise a gross return above 5 percent over just Q3, roughly equivalent to the quarter-to-date decline in share price.
Bed, Bath and Beyond (BBBY) has some lending characteristics in common with Dillard’s in that the ratio of borrows to exchange SI has increased from 80-100 percent since mid-June and active utilisation is greater than 80 percent. The average fee for BBBY shares moved outside general collateral in early June, however, remains in the single digits at the end of August. The absence of a significant increase in fees may be partly explained by an overhang of lendable shares which aren’t being made available at current fee levels. Some view on that can be gained by comparing the impact of the ‘active’ filter which removes inventory lending accounts which haven’t recently made loans. For BBBY there are 14 million shares currently being removed based on the lender not having made recent loans, compared with DDS where there are only 360,000 shares being filtered out.
Share price volatility has created trading opportunities on the long and short side in the US retailing industry group. The elevated borrow demand from short sellers has pushed up on lending fees, particularly for some of the stocks with fewer free-floating shares. Stocks in the US retailing industry group have returned $71 million in Q3 loan revenues, already the most for any quarter since Q3 2017, with September still ahead. Upcoming dividends for OSTK, BBBY and DDS could all see increased borrow demand in the securities lending market as broker dealers seek the most efficient means to borrow shares over record dates. With the retailing sector has underperforming broad US equity indices year-to-date, the uptick in lending revenue is a most welcome offset for shareholders.
In early July the fee for new Overstock.com (OSTK) borrows briefly exceeded 100 percent, the highest level since at least 2006. Then, as lending fees are wont to do, the marginal fee for new borrows declined from the peak, but only so much as required to meet the average fee for all borrows in the 50 percent area, the latter having increased on the back of re-rates as well. As shareholders and short sellers anticipate the digital token dividend (record date 23 September) and contemplate a Patrick Byrne-less OSTK, it’s no surprise the borrow availability is still tight and fees remain elevated.
Dillard’s (DDS) was a general borrow as recently as June, however, when active utilisation reached 85 percent on 7 June lenders were able to start pushing out new loans at higher fees. The ratio of the NYSE reported short interest to the number of borrowed shares reported to IHS Markit increased from 75 percent in mid-April to 100 percent on 11 June, reflecting a decline in prime broker’s ability to internally source shares for short sellers to borrow. The increased utilisation and perceived decline in prime brokerage internal supply, along with increasing borrow demand from short sellers, was the perfect recipe to drive special fees. The average fee for Q3 is 22 percent, suggesting shareholders could realise a gross return above 5 percent over just Q3, roughly equivalent to the quarter-to-date decline in share price.
Bed, Bath and Beyond (BBBY) has some lending characteristics in common with Dillard’s in that the ratio of borrows to exchange SI has increased from 80-100 percent since mid-June and active utilisation is greater than 80 percent. The average fee for BBBY shares moved outside general collateral in early June, however, remains in the single digits at the end of August. The absence of a significant increase in fees may be partly explained by an overhang of lendable shares which aren’t being made available at current fee levels. Some view on that can be gained by comparing the impact of the ‘active’ filter which removes inventory lending accounts which haven’t recently made loans. For BBBY there are 14 million shares currently being removed based on the lender not having made recent loans, compared with DDS where there are only 360,000 shares being filtered out.
Share price volatility has created trading opportunities on the long and short side in the US retailing industry group. The elevated borrow demand from short sellers has pushed up on lending fees, particularly for some of the stocks with fewer free-floating shares. Stocks in the US retailing industry group have returned $71 million in Q3 loan revenues, already the most for any quarter since Q3 2017, with September still ahead. Upcoming dividends for OSTK, BBBY and DDS could all see increased borrow demand in the securities lending market as broker dealers seek the most efficient means to borrow shares over record dates. With the retailing sector has underperforming broad US equity indices year-to-date, the uptick in lending revenue is a most welcome offset for shareholders.
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