Hedge funds take aim at Brexit-hit retailers

Political and economic uncertainties arising out of Brexit and May’s surprise snap elections are significantly contributing to falling sales for retailers in the UK.

Britain’s inconclusive general elections along with its upcoming exit from the European Union has many hedge funds significantly upping their bets against the country’s traditional high street retailers, as the sector struggles to cope with fierce online competition, which is only weakening sales and profit margins.

On Tuesday, this was on full display when shares of Debenhams slipped by more than 3% to its 8 year nadir following a weak trading update and a warning on falling sales.

Worrying data on consumer spending have muddied the outlook on bricks-and-mortar retailers, including Marks & Spencer, Next and Debenhams, whose shares have fallen significantly this year.

Short sellers are doubling down: of the top 10 stocks that have been most shorted in the UK, five belong to the retail sector, as per available data from UK’s Financial Conduct Authority.

Earlier on June 15, sofa retailer DFS had in its profit guidance report stated that it would miss its profit expectations this year. It put the blame squarely on uncertain economic and political outlook and said the lack of demand was “market-wide”.

Its comments sent the stock index that tracks Britain’s retailers into a tailspin, which saw its biggest fall since Britain shock decision to leave the EU.

To top it, Amazon’s announcement of its intention to buy Whole Foods stoked fears that the e-commerce giant will now make a splash into the retail sector.

Investors and analysts have now braced themselves for further weaknesses.

“Traditional clothing retailers are an area where I find it much harder to see how the pressure is going to go away,” said Matthew Tillett, a fund manager at Allianz Global Investors.

“I am always asking, ‘is it Amazon-able?’ If the answer to that question is ‘yes’ it is always going to be hard for me to buy a bricks and mortar retailer.”

As per statistical data from the UK’s Office of National Statistics, retail sales have fallen more sharply than was expected in May, which can be almost directly attributed to DFS profit warning.

“It is a tough backdrop,” said Tineke Frikkee, a fund manager at Smith & Williamson. “The response shows you the glass is half empty on these stocks,” said Frikkee.

Of the hedge funds shorting M&S Marshall Wace, which has a 2.3% position in the company’s shares and is also shorting Pets At Home, a pet food retailer. At $166 million (130 million pounds), its bet is one of the fund’s largest shorts in the UK.

Marshall Wace declined to comment.

As per filing data, Odey Asset Management has increased its short position by nearly 4% on Debenhams, one of the UK’s most shorted stocks.

Odey Asset Management did not respond to requests for comment.


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