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Are the shorters getting bullish on retail?

Paul Rickard
Thursday, March 14, 2019

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If you have been reading the mainstream press, retail looks like a disaster area. Retail turnover rose in January by a tiny 0.1% following a very ordinary Christmas; consumers are feeling the “inverse wealth” effect of tumbling home prices and delaying discretionary purchases; consumer confidence is on the ropes; the Amazon juggernaut is going to destroy local retailers; and high street shops stand empty as consumers move their buying online and landlords refuse to budge on rents.

Supporting these stories has been the recent collapse of high profile retailers, including Roger David, Toys R Us, Max Brenner and Laura Ashley.

But the share market is telling a slightly different story, particularly from those who stand to make money from the retail sector falling into a hole. These are the professional investors who “bet” against the fortunes of a company by selling the shares short. That is, they sell a company’s shares with the aim of buying them back at a lower price and making a profit.

According to the latest figures from ASIC, which publishes data every day on the number and value of short positions, these are falling when it comes to Australia’s major discretionary retailers. Leading retailer JB Hi-Fi has seen its short position close from 17.77% of the total shares outstanding 3 months’ ago to 13.15% today.

While this is still a big short position, the reduction by more than a quarter represents the net purchase of 5.3 million JB Hi-Fi shares – worth about $125m. And as the table below shows, positions in Myer have closed from 11.75% to 10.07%, while Harvey Norman has reduced to 8.69%.

Major retailers - % of shares short sold  

 

* ASIC short position reports for trade dates 7 March 19 and 7 March 18

Looking at the share prices, the major retailers have bounced hard. Harvey Norman is up almost 28% from its low in November 2018 of $2.99, JB Hi-Fi is up 16.7% from its low on 4 January, while Super Retail Group (which owns the Rebel Sports, BCF, Supercheap Auto and Macpac brands) is up 23% from its low on 14 January.

Harvey Norman (HVN) – 3/14 to 3/19

JB Hi-Fi (JBH) – 3/14 to 3/19

Super Retail Group (SUL) – 3/14 to 3/19

So, what’s behind the short covering and recent share price surge? No doubt part of the answer is that retail stocks got “too cheap” and moved into “value” territory, encouraging some of the short sellers to cash in on their profits. But there are also two other key factors.

Firstly, the realization that the “Amazon juggernaut” hasn’t made that much headway. While it is not quite stalled, it isn’t getting much traction with Australian consumers. Logistics is proving to be more challenging than expected, the range of goods is narrower and Australian retailers are fighting hard on-line with price.

Next, the half year profit reports weren’t too bad. JB Hi-Fi reported a profit for the December half of $160.1m, up 5.5% on the corresponding period in FY18. The company re-affirmed guidance for full year profit of $237m to $245m, up by 1.6% to 5.1% on the 2018 result. In its key Australian JB Hi-Fi retail business, it grew both comparable store sales and margin. The recently acquired Good Guys business, which had been struggling, showed a small re-bound in sales.

Harvey Norman also posted an improved profit result for the December half, up 7.3% to $222.7m, but removing some one-offs, the underlying profit result was flat. While there was some weakness with the Australian business (comparable store sales growth fell by 0.6% in the half, and for the first 7 weeks of 2019, was down 2.2% on the same period last year), the market liked the improved contribution from Harvey Norman’s offshore businesses. In fact, 25.4% of group profit now comes from Harvey Norman’s stores offshore, in New Zealand, Singapore, Malaysia, Ireland, Northern Ireland, Slovenia and Croatia.

More upside to come?

Retail stocks remain cheap, trading in the main on multiples of around 11.0 to 12.0 times forecast FY19 earnings (fast fashion jewellery chain Lovisa is an exception, trading on a multiple of almost 28 times). And yields are attractive, with Harvey Norman (according to FN Arena) forecast to yield 6.7% fully franked (based on a current share price of $3.84), and JB Hi-Fi 5.9% (current share price $23.36).

While the calling of the federal election will help, it is unlikely to prompt a big rebound in consumer confidence and translate into a lift in retail turnover. Amazon may not prove to be the threat that some expected, but the shift online will continue and in this environment, margins will remain under pressure. The negative macro factors aren’t going away in the short term.

Hence, I am approaching the sector using a “buy in weakness”/”buy in dips” style strategy. JB Hi-Fi, Australia’s premiere retailer, is my pick. The major broker analysts are marginally positive on the stock (3 buy, 3 neutral, 2 sell recommendations) and have a target price of $24.74. At lower prices, nearer to $3.00 than $4.00, Harvey Norman also has appeal. Being more exposed to the state of the Australian housing market, I view it as higher risk than JB Hi-Fi. The broker analysts  agree, with a target price of just $3.72 (below the current market price) and 2 buy, 2 hold and 2 sell recommendations. Myer is in another category all together- forget.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Published: Thursday, March 14, 2019


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