LON:ABF | Shorting The Christmas Retailers - Bets Now Closed 13/1/2016 | GrindertraderUK

26th Dec '15 by GrindertraderUK

58 comments 38393 reads

'Shorting the Christmas Retailers'

What a bold headline to make during the season of goodwill to all everyone. I am sure that I will get some thumbs down for just the miserable subject title alone! However my timing is probably perfect. Since it is boxing day I doubt many people will actually bother to read this post. So I may be safe from the howls of the bullish retailer investors who at this time are probably thinking of buying the Christmas/New Year sales; rather than reading this.

But despite being the season of goodwill we must stick to our unemotional plans when investing no matter what the time of the year is. So today I read a very interesting article in The Times Newspaper Business Section. It too had a happy headline called 'Short-sellers betting retailers will disappoint' It seemed quite disappointing to read considering that this is meant to be the best part of the cyclical year for many retailers. So what on earth is the Times doing giving us all this doom and gloom.

Well this shouldn't have come as a big surprise. Even before The Times article I was aware of the profit warning from Game Digital (LON:GMD) (how could anyone miss it), and also Bonmarche Holdings (LON:BON) . In my opinion I wasn't surprised at £GMD as I believe in the digital age of practically buying instant download games, then stores are kinda well old fashioned. Bonmarche Holdings (LON:BON) I am not so sure. I felt the market was over reacted, and the business model is still sound.

But as mentioned in the article, Black Friday, warmer Christmas, slowdown in China the hedge funds have taken notice and in most cases increasing shorting opportunities in all the retailers.

So I wonder how I could jump on the bandwagon and try to make money short selling some of the retailers. But the question that I asked myself was 'Which Ones?' I took the time to build lists and filters checking retailers for High forecasted PE's, low forecasted earnings growth and anything else that would for me anyway knock the price down should the speculated profit warnings become fact.

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ls2g08

26th Dec '15

I own next and while I think it is a quality retailer I have been very tempted to hedge my position as I agree with all your points above, it is on quite a full rating.

gus 1065

Interesting point of view. Hard to see Bonmarche Holdings (LON:BON), Home Retail (LON:HOME) or Marks and Spencer (LON:MKS) for that matter going much lower after two recent profit warnings and an already bearish view on Marks and Spencer (LON:MKS) clothing if not their food offering. I've taken small punts the other way on the first two albeit with a longer 12 to 24 month view. Anecdotally, I sense a similar amount of retail expenditure is taking place but anyone without a strong online business will be in trouble.

Following this migration to online shopping, I'll be interested to see how the home delivery companies fare into the New Year. According to my postie - Royal Mail (LON:RMG) -, he's never been this busy over Christmas in his thirty years on the job...

All the best,

Gus.

(As a reference point, I see short tracker showing Home Retail (LON:HOME) has 8.6% and £ASC has 6.2% of their stock shorted at the moment)

janebolacha

Ian, it's Game Digital (GMD) that is the retailer of games which issued the rather dreadful profit warning, not Game Account Network (GAME) which is a different and unrelated company involved in developing gaming (i.e. gambling) systems for casinos and online betting.

GrindertraderUK

Ah ha thanks for spotting this. I will amend the post when am back on PC . Thanks Again

Rusty2

I think Next (LON:NXT), looks relatively good value, the share price is back down to where it was 12 months ago, trading statement is out 5/1/16. I would look at their historical values not just the peer values, Next (LON:NXT) is usually expensive. One I would be adding to the short list is Ted Baker (LON:TED). I agree that ASOS (LON:ASC) maybe due a fall as its up 30% recently and it seems to be bouncing between £25 - £35. Yes Bonmarche Holdings (LON:BON) has already fallen 40% so I agree with Gus. Not sure about Home Retail (LON:HOME)

I don't do shorting but I think holding for 6 months maybe too long, say Next (LON:NXT) does fall on 5th Jan 16, I think it will bounce back fairly quickly.

Sully8786

Nice piece Grindertrader - like some other readers, I hold Next (LON:NXT) - the SP has bee ticking down for a while - I wouldn't be surprised to see a warning next week or see the company trading at the bottom end of its forecasts. One of those things with retailers, I guess.

Rgds,

Sully.

Paul Scott

27th Dec '15

Hi Ian,

Interesting idea, but I think you've mostly missed the boat on this. The shares you highlight have in many cases already dropped considerably, so the market has already priced-in the main issue - which is the extremely mild weather this autumn/winter. It's the mildest weather I can ever recall at this time of year, in my lifetime, so will have an extreme impact on fashion retailers.

However, one poor season doesn't mean the value of a successful fashion retailer has dropped very much, if at all. When buying the shares, you are buying all future years' earnings, not just this season's earnings.

What I observed when an FD in the sector, is that a poor Xmas is often followed by a rip-roaring January sale - there is a long-term trend of customers leaving their spending later & later each year, and that will have been made far worse this year by the extremely mild weather. Although the January sales are of course at much lower margin than full-price sales in December, so it will still impact on full year profits.

So I would expect a lot of clothing retailers to have mild profit warnings, but saying that despite relatively poor sales in December, they have recouped a lot of the sales shortfall in January (especially if there is a cold snap - but not too cold, as snow/ice brings the High Street to a standstill for a few days).

Since the shares have already priced in poor trading, then you might find that mild profit warnings only have a maybe 5-10% impact on a share price, and then quickly rebound, as relief sets in that trading wasn't worse, and people start looking at attractive valuations, and anticipating a recovery in sales/profits in 2016.

The macro factors are actually rather good for retailers right now, and for the next few years - wages are rising, the population size in rising, so consumer spending should now be on a firm upward trend. Set against that, Living Wage will increase overheads, but that can be managed to a certain extent through productivity gains & automation of some processes.

Overall then, I suspect you might make a little profit on this basket of shorts, but in your shoes, I would close the shorts within a day or two of each company warning on profits, providing the warning is not too bad, because the shares could bounce back quite quickly I reckon.

If a profit warning is really bad, then that would suggest deeper problems than just the unseasonal weather.

You also have to consider the internet strategy for each retailer. So checking out the stats on Alexa.com for their website, and comparing it with competitors, is key to seeing how well their online activities are going. Also many now quantify online sales in their financial reports, so I think it's key to only invest in retailers which are successful online, as well as in physical stores.

Women especially enjoy shopping as a social experience, so online will never replace physical stores. Also, most women want to actually try on a garment in-store, to check on the fit, rather than mail-ordering (and remember that online sales are just a new front-end for mail order, which has been around for many decades, and mail order didn't kill off the High St did it? Nor will online kill it, but will supplement & compete with it).

It will be fascinating to see how things pan out, but personally I am building up a war chest to BUY retailer shares in January, hopefully after profit warnings, as I think that is now the bigger opportunity, rather than profit warnings which are largely already factored into the share prices.

You could also see takeover bids, as this is a highly cash generative sector, and has been extremely popular in the past for PE takeover bids, and if valuations bomb further, will be again I suggest.

Home Retail (LON:HOME) looks a sitting duck for a takeover bid, once you understand its balance sheet - as Cantors have pointed out, its EV is about nil, if you treat the consumer debt book as if it were cash. I think a bid is very likely once it has released details about its Xmas trading. Indeed several press reports have confirmed this is coming (for what it's worth!)

Regards, Paul.

Good morning, Paul, and "Boas Festas".

"Women especially enjoy shopping as a social experience, so online will never replace physical stores. Also, most women want to actually try on a garment in-store, to check on the fit, rather than mail-ordering (and remember that online sales are just a new front-end for mail order, which has been around for many decades, and mail order didn't kill off the High St did it? Nor will online kill it, but will supplement & compete with it). - See more at: http://www.stockopedia.com/content/shorting-the-christmas-retailers-115893/?comment=7#7"

Yes, women's measurements tend to be rather more complicated than men's!
That might explain why 35% of all goods bought online are sent back to shops.
I'd imagine that the percentage solely for women's clothing is even higher.
The "Telegraph" has come up with one play on this phenomenon,
although it seems quite expensive already at a PER of above 22.

"Clipper Logistics, which floated on London’s junior market in 2014, is tapping into one of the most important trends in the retail sector. It is effectively the plumbing behind John Lewis’s and other retailers’ click and collect services. However, what makes it really interesting is its so-called “Boomerang” service, which processes returned goods. The convenience of online shopping means items that don’t fit or aren’t suitable are sent back. British retailers lost £130m from the cost of handling returned items on Black Friday alone and with around 35pc of all goods bought online sent back to shops, the level of returns is only going to increase. The shares are riding high already, up by almost 70pc this year, but Clipper added Zara and South African billionaire Christo Wiese’s Pep&Co to its list of clients this year, and further wins are expected. "

http://www.telegraph.co.uk/finance/markets/12069867/The-Telegraphs-share-tips-for-2016.html

28th Dec '15

Hi Paul,

Sorry that it has taken a few days to reply. As you may have seen on twitter am now offshore and having to do some work for a change! But I appreciate the fact you took the time to reply. One of your forte is Retailers and so I do sit and seriously take in your opinions. Notice I didn't add Boohoo.Com (LON:BOO) to the short. I didn't want to risk getting on your wrong side lol.

I was reading today an article from the BBC that may put a damper on my plans and supports your opinion of the strength of the January Sales. Apparently the boxing days sales have so far been a success for many of the high street retailers. John Lewis reporting a 10.7% increase in revenues compared with last year for Christmas Day sales!

http://www.bbc.co.uk/news/business-35188482

I appreciate your views bullish views and explanation on Hi PE retailers at the moment. If the cycle of a bullish January appears to transpire then of course I will sell out quickly and admit to getting this wrong. I will take action depending how severe any profit warning is. So yep I will probably change my mind with the 3 month fixed period and perhaps react quickly taking any profit if a rebound seems likely.

It will be interesting to see how this pans out. I do not like to go against hedge funds when they are building up their stakes. But I also think that the stocks that have already declared their profit warnings may have their share prices effected by any possible forth coming profit warnings from retailers this next couple weeks. I do think I will make a total positive return whether the amount has made this worth while is something we will find out. plan to place the spread bets tomorrow.

On another matter I am going to long long on the house builder as traditionally I believe this time of year is the positive cycle for them. I may balance this against the amount I spread bet on shorting retailers. Hopefully I won't call BOTH strategies wrong! Or I'll just have enough change to buy a decent malt to drown my sorrows !

regards

Ian

I do follow house builders, again I feel you have maybe missed the boat as most have gone up in last few weeks, a few of the smaller ones like Telford Homes (LON:TEF) are still looking good value. Maybe land developers or companies like St. Modwen Properties (LON:SMP) are a better investment now?

I best not bother.. I keep missing boats lol

For the spirit of disclosure. I'm actually on one!

29th Dec '15

Hi Ian,

Sorry if the feedback sounded negative - it's not meant that way at all - I appreciate you stimulating an interesting discussion. It's always fascinating for me to see how retail pans out each Xmas.

I'm generally quite bullish on good quality fashion retailers, as the macro factors are good for retail spending, and so temporary setbacks on weather, etc, can be good buying opps.

Would be good to edit the article and correct the ticker from GMR to GMD, if you have time, as suggested by Jane, although I appreciate you're on an oil rig at the moment!

Best wishes, Paul.

Hi Paul,

Sorry my comment was a bit tongue is in cheek due to my current situation, but reading back I can see what you mean! You certainly value your opinions on this one .

I have fixed the GMD

Regards Ian

lucien2k

Not sure if anyone else saw it, but the "John Lewis and the Retail Race" TV show was quite revealing. They said that for them, Black Friday has become the starting gun for Christmas buying.

They used to see a slow ramp and the biggest buying the week before Christmas, now the peak is the last week of November and they see a decline each week until Christmas. So the shape has changed, and maybe that is why the sensationalists are shouting about bad December etc.

Here is the details of the basket of retailers that I have shorted. Small exposures, and stops are also in place. Some tight and some wide, which depended on how I felt on each individual stock. Bonmarche Holdings (LON:BON) is not included. There is a shortage of stock available to short. I plan to make this live idea dynamic and thus I will close shorts, increase them etc as and when I see fit. I'll do a final message once all retailer shorts have been closed.

It will be fun to see how this all ends up. I like to these type of trades, as they satisfy my curiosity, my gambling instinct thus satisfying my urge to gamble rather than interfere with my serious investing strategies.

Wish me luck!

regards Ian

Thanks for being so open. Good luck on everything (apart from Marks and Spencer (LON:MKS) and £HOME !)

Gus.

AlanJenkins2

Spotted the thread now- thanks for the pointer on twitter.

Lol I hear you Gus

Shorting the Christmas Retailers - Bets now Closed 13/1/2016

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