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

Friday, Nov 09 2012 by
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…

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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

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3 Comments on this Article show/hide all

Elias Jones 13th Nov '12 1 of 3

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.

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Ben Hobson 14th Nov '12 2 of 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

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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