Have short sellers got it wrong with Home Retail and Mothercare?

Friday, Nov 09 2012 by
7
Have short sellers got it wrong with Home Retail and Mothercare

Much has been made this week of the FSA’s introduction of a regularly updated list of the most shorted stocks in the UK – and who is shorting them. Brought in as part of the EU’s new disclosure regime for short selling, it’s the sort of list that offers journalists in particular an almost endless pot of feature ideas. 

Unsurprisingly, there has been no shortage of venom directed at the ‘ruthless’ hedge fund traders behind these shorts, and the chaos they can cause. That’s one way to see it - although as James Montier has argued: "Vilifying short sellers is the equivalent of punishing the detective rather than the criminal."

Under the new rules, investors holding short positions worth more than 0.2% of a company’s share capital have to tell the regulator. When the position exceeds 0.5% of the shares, then the details are made public. While this sort of disclosure may add more transparency to these sorts of trades, the usefulness of the list is still limited by its opacity. For instance, the list doesn’t easily distinguish between when short positions are opened, closed or changed. Inevitably it also only tells one side of the story; institutions can hold long and short positions simultaneously – so this list might not give an accurate view of what each money manager really thinks. Be that as it may, what does emerge is a general view of the types of companies and sectors that professional traders think are heading for trouble – and retailers really stick out. 

Christmas carnage 

In a fragile economy where consumers are still struggling, it seems that short sellers think Christmas will bring only disappointment to some of the biggest names on the High Street. Among them, Home Retail (LON:HOME) (the owner of Argos and Homebase) and Mothercare (LON:MTC), the children’s merchandise retailer, are notable. Both are currently attempting major reorganisations in the face of changing markets and stiff competition. In response, both have seen their share prices rise in recent months. So could the shorters have got it wrong? 

The recent experience of electronics chain Comet proves that failure to adapt to changing consumer habits can be fatal. At Home Retail, whose Argos website is the second most visited internet retailer in the UK (after Amazon), the nettle seems to have been grasped this year. The age-old catalogue model looks destined to be recycled into a far more internet-friendly approach, albeit with stores. One of the questions will be whether the group can get that transformation done quick enough and in a way that consumers respond to. Currently, more than 11% of its stock is being shorted, which suggests that many traders think it can’t do it. But the shares have displayed double-digit relative strength against the market for 12 months even in the face of declining sales figures last year. The stock has risen by around 18p to 111p in just over a month. 

Mothercare meanwhile, has been performing much better abroad than at home in recent years. While the brand holds kudos internationally, its portfolio of domestic out-of-town stores has been letting it down. As the father of two young children, I confess that Mothercare has in the past been a great place to check out buggies and suchlike before buying them cheaper on the internet. The group has long been trying to slim down its UK store base and the introduction of a slicker web site has helped to get the UK business growing again – which sent the shares from 200p to 300p last month. That won’t be welcome news to the two funds that are currently shorting an aggregate 3.76% of the company’s stock. 

Like most of the retailers on the FSA short selling list, Christmas is going to be vital this year for Home Retail and Mothercare (as it always is). On the upside, both groups seem to have at least some idea of where their problems lie and are trying to fix them. So the question is whether they can do enough to reshape their businesses and continue to win the faith of investors or whether the shorters, sensing inevitable decline, have called it right. 

For those that are interesting in understanding shorting in more depth, we discuss some of the better approaches to doing it here and here. Of course, it’s important to be aware of the risks of short selling. Unlike long investing, there’s the potential for (theoretically) infinite losses coupled with the risk that comes with the use of leverage. Interestingly, in the year to date, the five short screens that we’re tracking are all in negative territory in the year to date, with the worst (or rather best) performing screen down 23.5%. None of those screens mentions Mothercare or Home Retail. 


Filed Under: Short Selling,
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    Home Retail Group plc is a United kingdom-based home and general merchandise retailer. The Company is organized into three business segments: Argos, Homebase and Financial Services together with Central Activities. Argos is a general merchandise retailer. Homebase is a home enhancement retailer and offers a range of home improvement products in a differentiated store environment. Its Financial Services business works in conjunction with Argos and Homebase to provide its customers with the credit offers to drive product sales. It has approximately 67,000 products available across Argos and Homebase. The Company’s subsidiaries include Home Retail Group (UK) Limited, Argos Limited, Argos Distributors (Ireland) Limited, Homebase Limited and Homebase House and Garden Centre Limited. more »

    Share Price (Full)
    209.3p
    Change
    -3.8  -1.8%
    P/E (fwd)
    18.6
    Yield (fwd)
    1.7
    Mkt Cap (£m)
    1,733

    Mothercare plc is a retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. It has two segments: UK and the International business. The UK consists of the United Kingdom store and wholesale operations, catalogue and Web sales. The International business consists of franchise and wholesale revenues outside the United Kingdom. It offers products for mothers-to-be, babies and children up to the age of eight. It offers maternity and children’s clothing, furniture and home furnishings, bedding, feeding, bathing, travel equipment and toys. It sells its products through multi-channel retail and wholesale operations in the United Kingdom and through franchise operations across its international markets in the Middle East and Africa, Europe, Asia and Latin America. more »

    Share Price (Full)
    197.24p
    Change
    1.5  0.8%
    P/E (fwd)
    16.3
    Yield (fwd)
    n/a
    Mkt Cap (£m)
    173.4



      Is Home Retail fundamentally strong or weak? Find out More »


    3 Comments on this Article show/hide all

    Elias Jones 13th Nov '12 1 of 3
    2

    Very interesting article Ben, I would edge with the short guys in relation to HOME, for the fact that ARGOS has a lot of work to do and limited time to achieve.

    You mention the ARGOS website being the second most visited internet retailer in the UK after Amazon, however its online offering needs a lot of work to be close to the level of service offered by Amazon and John Lewis.

    The stores and product offering needs a full overhaul and the estate needs to be looked at seriously. I don’t feel that its turnaround strategy goes deep enough and trading from 740 stores at an average of £86 per week per store profit is trading very close to the bone.

    | Link | Share
    Ben Hobson 14th Nov '12 2 of 3
    3

    Hi Elias. I'd go along with that. Although at two ends of the spectrum, Argos and John Lewis have the same model for online sales - they'll either deliver or you can click & collect. But there are differences - John Lewis deliver free on orders over £50 (not always the case with Argos). Likewise, click & collect gives John Lewis another chance to sell you something because you have to walk through the store. With Argos, there is nothing to see at the store so you're less likely to buy anything else.

    In addition, Argos are now in a place where they are competing against people like Tesco Direct - where you can order an iPad (or whatever) online and pick it up when you're doing your grocery shopping on a Saturday morning. That seems like a big problem to me. There might be more to it, but I just can't see how they can compete seriously online and still justify running all those stores.

    Oh dear, you can tell Christmas is coming - I can feel the retail fatigue setting in already!

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    Elias Jones 15th Nov '12 3 of 3
    1

    Adding more fuel to a short position on retail is todays retail figures showing a 0.8% drop in sales during October when compared to September. September was especially good for footwear and clothing with back to school and winter clothing ranges having a good boost, but with the rise in inflation and shoppers having to possibly re-evaluate and tighten up before the Christmas spending October took a step back. This dip is worrying bearing in mind that we are now in the golden quarter for retail.

    Although when compared on a like for like year on year it was up 0.6%, the figures today possibly indicate that the next quarterly GDP figure could be under pressure which could edge us towards a triple dip.

    I also noticed a report today from Skipton financial services indicating that in order to get by with all their living expenses on average each family needs to bring home after deductions £24,801 which is up £129 on last year.

    With pay on the whole frozen for most and inflation at 2.7% it’s not a rosy outlook for retail, hence a negative feeling for retail stocks in general especially if they have a poor online offer.

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About Ben Hobson

Ben Hobson

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Strategies Editor at Stockopedia.  I make sure that Stockopedia is delivering the features that its members want to see.



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