Short Sellers Flock To Retail As Pessimism Grows

Growing pessimism about the outlook for the U.K. retail sector is starkly reflected in the sharp rise in short selling of mid and small-cap retail stocks as consumers face a year of austerity and retailers fight increased cost pressure.

Retailers make up six of the top 20 FTSE All-Share companies with the most short interest, according to Data Explorers which uses shares on loan as a proxy to estimate short interest in a stock.

Short sellers bet on share prices falling and are themselves a litmus of market sentiment, although their calls are not always correct.

Home Retail Group PLC (HRG.LN), Dixons Retail PLC (DXNS.LN), Mothercare PLC (MTC.LN) and Debenhams PLC (DEB.LN) have all seen their short interest more than double since October 2010 when the U.K. government announced its spending review and outlined a raft of tax rises, budget cuts and job losses that are beginning to squeeze consumer disposable income.

Shares in U.K. listed general retailers have fallen 8.5% since the spending review, with much of this decline coming since January when the retailers updated on Christmas sales that were hit by snow and bad weather.

Consumer confidence fell sharply in January, wiping out any positive Christmas sentiment, according to a monthly Nationwide survey, and compounding a shock contraction in the U.K. economy in the fourth quarter of 2010.

Retailers are also facing rising costs as world shortages squeeze supply of commodities and raw materials prices head towards peak 2008 levels.

Cotton prices and Chinese wage inflation are already weighing on apparel retailers with Next PLC (NXT.LN) warning it will have to raise prices by 8% this year, and high oil and sugar prices wiping out Britvic PLC's (BVIC.LN) operating profit margin improvement this year.

But not all market watchers are so pessimistic. Espirito Santo retail analysts believe that declining consumer confidence will reverse or at least not deteriorate in the next 6-12 months, while Seymour Pierce analysts expect the second half of the year to be relatively better than a tough first half.

Still, short sellers are clearly prescient. Figures from the Confederation of British Industry Thursday showed that U.K. retail sales growth slowed sharply in February, while shop price inflation soared to a 20-year high.

By Kathy Gordon, Dow Jones Newswires; 44-207-842-9293; kathy.gordon@dowjones.com

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