US retail recovery delivers $28bn blow to short sellers

A pandemic boom for homewares, ecommerce and discount stores has wrongfooted hedge funds and other speculators who bet against US retailers before a historic rally, according to an analysis of $27.8bn in losses that the bearish positions have racked up since the start of April.

An index of 88 listed US retail stocks has surged 57 per cent over the period, more than double the rally in the wider market, causing heavy paper losses for short sellers who expected the sector to be at the sharp end of the coronavirus crisis.

Shorts, which profit when share prices decline and had gambled on a broad-based sell-off in US retail, were caught out again this week after economic data pointed to a return of discretionary consumer spending. US retail sales rebounded 17.7 per cent in May from a slump in April, more than twice the rate of recovery that economists had forecast.

According to data provider S3 Partners, those who anticipated a squeeze in household finances to dent spending on furniture and home improvement have been hit particularly hard. Americans under lockdown have splashed out on upgrading their living spaces, driving up shares in companies with homewares exposure.

Shorts have lost $3bn on Wayfair, the online retailer, whose shares have quadrupled since March. “We’ve had a tsunami of new customers come in,” Niraj Shah, co-founder, told an industry conference this week.

Bar chart of mark-to-market losses on short positions since April 3 ($bn) showing short sellers lose billions in US retail rally

The shorts’ mark-to-market loss on Wayfair is greater than 100 per cent of the value of their interest in the stock. In dollar terms, it is almost as large as their loss on Amazon over the period, even though Wayfair’s $19bn market capitalisation is little more than 1 per cent of Amazon’s.

Despite the recent losses, shorts still have an aggressive position against Wayfair, equivalent to 30 per cent of its floated stock. Bears remain sceptical about the group’s expenses, particularly marketing costs, which pushed it to a $286m first-quarter loss despite a 20 per cent year-on-year jump in sales.

Losses on shorts in furnishings company RH, formerly known as Restoration Hardware, and the duvets-to-dinnerware chain Bed Bath & Beyond are also equivalent to almost 100 per cent of the value of the positions over the period.

Shorts also lost $490m, on Williams-Sonoma, an upscale kitchenware brand. “We’ve had great success during this time,” Laura Alber, Williams-Sonoma’s chief executive, told the conference this week.

The resurgence of DIY during lockdown has pushed up shares in Home Depot and Lowe’s, resulting in a combined $1.2bn loss for short sellers.

In a handful of cases, negative positions against retailers have paid off. Shorts have turned a $96m profit over the period on Tiffany, as concerns have grown that the crisis threatens the jeweller’s planned acquisition by LVMH, and eked out a $2m gain on the department store group JCPenney, which filed for bankruptcy last month. 

However, shorts have incurred heavy paper losses on ecommerce groups including ebay and Etsy, the used car dealer CarMax, and the discount retailer Ollie’s Bargain Outlet.

Indeed, despite widespread store closures and the onset of a global recession, only three out of 88 listed US retail stocks have declined since the start of April.

“Shorts in the retail sector have taken a big hit,” said Ihor Dusaniwsky, managing director at S3 Partners. “People jumped into those names thinking retail spending was going to drop. But the online services really did well, and it really caught the short sellers unaware that there was going to be a very quick recovery in a lot of these stock prices.”

Discretionary bricks-and-mortar retailers are recovering only gradually as restrictions on movement are loosened, however, and shorts are betting equity prices will eventually reflect intense financial pressures in the sector. Clothing chains J Jill and Francesca’s have warned in recent days about their ability to continue as going concerns.

As of this week, short interest in US retail totalled $70.4bn, up from $46.7bn at the end of March, according to S3.

The biggest position is against Bed Bath & Beyond, where shorts have accumulated positions equivalent to 62 per cent of the company’s floated stock.