People walk through a nearly empty shopping mall on March 28, 2017 in Waterbury, Connecticut.
Investors have sharply increased their bets against the US retail sector ahead of the holiday shopping season, anticipating that shoppers will continue their migration to the internet from the local mall.
So-called short interest in US retail stocks — the proportion of a company's shares on loan to short sellers who are betting they will fall in value — has reached the highest level in at least two years, after jumping 17 per cent in the past month, according to IHS Markit.
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The holiday shopping season kicks off in earnest in the US this week, with the traditional "Black Friday" sales that draw shoppers after the Thanksgiving Day holiday.
Macy's, the department store chain, is among the most shorted retailers with short interest topping 17 per cent of the underlying shares, an increase of more than 40 per cent over the past month.
Short interest for rival Nordstrom was 12 per cent, Kohl's 11 per cent while Target topped 6 per cent.Across all of the S&P 500's retail constituents, 5.6 per cent of shares outstanding were on loan to short sellers at the end of last week. By contrast, short interest for the benchmark S&P 500 index was 2.7 per cent.
"This is one of the easier trades you put on around the holidays," says Nicholas Colas, co-founder of DataTrek, an investment newsletter. "You short retail before the holidays because invariably the reality never lives up to the hype."
He added that this year "it does seem like investors and traders are shorting retail because they feel Amazon and other online retailers will have a great year and take more share away from brick and mortar retail."
Short interest in Amazon amounted to just 0.14 per cent of its float.
While analysts are forecasting record Black Friday sales, the holiday season caps off a torrid year for retailers.
Department stores, the anchors of American shopping malls, have been particularly brutalised by the shift towards ecommerce. Macy's this month reported same-store sales shrunk for the 11th straight quarter. Nordstrom last month abandoned plans to go private after financing dried up. Kohl's in the third quarter squeezed out its first sales rise in nearly two years: of 0.1 per cent.
"No one has yet proven that they can withstand the Amazon onslaught, particularly over Black Friday," says Joel Bines, director at AlixPartners, a consultancy. Some retailers are slashing prices to try to maintain market share as fewer people walk into malls to shop, but this strategy eats into margins.
Still, short selling can be a risky strategy for investors, as even modestly positive surprises in performance can prompt a big share price jump. In a "short squeeze", short sellers are forced to buy stock to cover their positions, accelerating the upward move and exacerbating their losses.
Last Friday, for example, Abercrombie & Fitch and Foot Locker jumped more than 20 per cent in a matter of minutes.
"Retailers have done a very good job of lowering expectations dramatically," says Mr Bines. "Even the slightest beat can result in a giant increase in market value on a percentage basis."
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