Traders bet on back-to-school disappointment

Short sellers, expecting a weak fall shopping season, are counting on poor reports from retailers.

By MSN Money Partner Aug 22, 2014 12:59PM
Credit: © Jeff Greenberg/Alamy
Caption: Back to school sale at a mall in Miami, Fla.By Everett Rosenfeld, CNBC

While many retailers spin humdrum quarters with shining previews of the back-to-school shopping season, short sellers are placing big bets that parents' wallets will not be so open.

Although short positions have grown slightly throughout the entire retail sector, those companies with "more skin in the back to school game" have seen the brunt of these bets, Markit analyst Simon Colvin wrote in a note identifying the trend.


These companies include teen clothing retailers such as American Eagle (AEO) and Aeropostale (ARO), but also include department stores like Kohl's (KSS) and Macy's (M) that have pegged their near-term outlooks to back-to-school success.

Exemplifying this trend, shares of Kohl's have steadily risen since the end of July, and its second-quarter profit announcement beat Wall Street estimates, but short sellers are still piling into the stock: Short interest has jumped over 42 percent in the past three months.

And while the department store reported a sales bump in late July -- potentially auguring a strong back-to-school shopping stretch -- Colvin wrote in his recent note that short sellers "look to have doubled down" on an impending weak season.

Short sellers will often look for make-or-break periods for a company, so their thesis about its potential can be well proven for all of the market to see. And for many of these companies, much of a year's success relies on the back-to-school season.

Still, Kohl's CEO Kevin Mansell was confident on an earnings call last week, saying that "the start to back-to-school has indicated from our July performance was exceptionally strong."

American Eagle has also seen a major uptick in bets that it will disappoint, with its short interest rising nearly 35 percent in the past three months, according to FactSet. It should be noted, however, that the retailer still has a smaller percentage of its outstanding shares shorted (16.85 percent) than competitors Abercrombie & Fitch (ANF) and Aeropostale (22.63 and 29.46 percent, respectively).

As a whole, those teen retailers have suffered recently as tastes changemoms disapprove, and new stores encroach on their territory. But earnings so far this quarter have surprised to the upside -- despite short sellers seemingly anticipating a flunking grade for their back-to-school test.

Stock exchanges publish semi-monthly information on short interest, so the most recent data for these retailers goes back to Aug. 1 figures, and many of the shorts may have exited since these company's earnings announcements and back-to-school projections.

In fact, Stifel Nicolaus analyst Richard Jaffe pointed to American Eagle's 15 percent jump since its Wednesday earning announcement as evidence that its "encouraging view for the back-to-school season" may have led some to ditch their short bet.

"Suddenly your shorts aren't working out, and they're popping," he said. "I bet people were short and are scrambling to cover."

Jaffe predicted that other stocks with back-to-school short bets may soon see similar action.

"Broadly speaking, the back-to-school season has started strongly -- stronger than anticipated, with a better than anticipated [third quarter] outlook," he said. "That's the kind of stuff you don't want to be short."

The chart below includes many of the companies that analysts say will benefit from the back-to-school season. Some -- like Wal-Mart (WMT), Macy's, and TJX (TJX) -- do not have a high percentage of shares shorted, but even they have seen a shorting uptick in recent months.

Short % of shares outstanding
3-month short change
American Eagle OutfittersAEO   16.85%34.74%
Abercrombie & FitchANF   22.63%5.03%
AeropostaleARO   29.46%13.45%
The TJX CompaniesTJX   1.46%22.08%
Kohl'sKSS   14.82%42.34%
Macy'sM   2.83%17.29%
Wal-Mart StoresWMT   1.11%20.82%
StaplesSPLS   14.74%2.27%

Investors have also reduced their exposure to retail exchange traded funds, Colvin noted in his Markit analysis, with over $500 million in outflows since the beginning of the year. Because this trend extends to January, however, it is less tied to the back-to-school sentiment than the short interest figures.

More from CNBC

Aug 22, 2014 2:45PM
Time to lose a bunch of "traders". 
Aug 22, 2014 5:11PM
Not a shocker people, after the last couple of weeks these manipulators are fit to be tied so the last 30 minutes they did their thing and brought us down a bit....Not a surprise because of the low volume and the number of dirt bags on and off the floor....Oh well, cant keep these scumbags down forever....They are trying to build momentum for next week...We shall see...Have a great weekend all.
Aug 25, 2014 9:21AM
avatar can retailers have a disappointing Fall season when our gov and their "puppet head" media are telling everyone how great the economy is?
Aug 22, 2014 3:26PM
Less than 45 minutes to go and we have a tug of war down here...we are trying to end the day flat to a bit up and these scumbags of course trying to bring us down...Plenty of them and low volume, not an optimal combination...We will see what happens...More after the close.
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