The widely-anticipated demise of brick-and-mortar retailing in the face of online competition led by Amazon.com Inc. (AMZN) has spurred significant short selling of these stocks. “It was almost as if they [the shorts] were acting like no retail real estate space can work,” as Brad Lamensdorf, a portfolio manager at Ranger Alternative Management, told the Financial Times. “That’s not the way we’re looking at it. There’s too much capacity, but that doesn’t mean retail real estate is dead,” he added.
The table below lists the 12 biggest losing bets on short sales of retail stocks across the last 18 months. It excludes Amazon but includes other online players, per data that financial analytics firm S3 Partners shared with Investopedia.
Mega Losses For Short Sellers
(From Aug. 21, 2017 to Feb. 20, 2019)
- Target Corp. (TGT), $886 million loss
- Wayfair Inc. (W), $878 million loss
- Kohl's Corp. (KSS), $863 million loss
- RH (RH), $810 million loss
- GrubHub Inc. (GRUB), $689 million loss
- The Home Depot Inc. (HD), $562 million loss
- O'Reilly Automotive Inc. (ORLY), $558 million loss
- Autozone Inc. (AZO), $553 million loss
- Macy's Inc. (M), $508 million loss
- Dollar General Corp. (DG), $462 million loss
- Five Below Inc. (FIVE), $426 million loss
- TJX Companies Inc. (TJX), $396 million loss
- Total of 12 stocks above, $7.592 billion loss
Source: S3 Partners
Significance For Investors
"There was an overreaction in 2017," is how Jim Tierney, chief investment officer (CIO) of concentrated U.S. growth at AllianceBernstein, summed up the situation to the FT. According to Michael Arone, chief investment strategist at State Street Global Advisors, "It's a slow death by a thousand paper cuts, and not the kind of 'mall-mageddon' originally anticipated by that trade." He added, "Retail has been much more volatile than many would have expected. It hasn't been decidedly one way down."
The study period used by S3 Partners started on Aug. 21, 2017, when the SPDR S&P Retail ETF (XRT) hit a four-year low. From that date through Feb. 20, 2019, the XRT advanced by 23.1%. That rally in retailing stocks, both traditional and online, produced a net mark-to-market loss of $11.9 billion for the short sellers, with $7.6 billion (or 64%) of it generated by the 12 stocks listed above. These figures exclude Amazon.
While bankruptcies are mounting in retail, some of the biggest companies in the industry are reporting their strongest results in years, most notably Walmart Inc. (WMT). "Those who are innovating and investing in e-commerce, marketing and social media tend to be doing well," according to Ken Murphy, a fund manager at Aberdeen Standard Investments.
Interestingly, by far the biggest cumulative loss in retail for short sellers comes from Amazon itself, at $3.8 billion. Amazon has been in the unique position of being both a formidable competitor that is laying waste to its competition in retail, spurring short selling of those rivals, but also a stock that viewed as highly overvalued, and thus riding for a fall. That fall has not come yet.
The top five winning short bets during S3 Partners' study period were: GameStop Corp. (GME), a $258 million gain; J.C. Penney Co. Inc. (JCP), a $240 million gain; Big Lots Inc. (BIG), a $172 million gain; Signet Jewelers Ltd. (SIG), also a $172 million gain; and Bed Bath & Beyond Inc. (BBBY), a $167 million gain. Penney has "massive over-capacity," per Brad Lamensdorf.
As Jim Tierney told the FT, "The U.S. is still over-stored. [Due to e-commerce,] more of the store base is not economic. That's going to be a secular pressure for years to come. For those retailers that don't have a digital strategy, it's just a matter of time before they fall."