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Capital Markets

Wave of short-selling indicates more suffering for UK retails in 2012

UK retailers have been targeted heavily by short-sellers amid fears that the eurozone crisis and debt problems could negatively affect the sector

The UK retail sector looks likely to suffer in 2012, as analysts expect reduced consumer activity due to a mixture of government-imposed austerity measures and the impact of a likely recession in eurozone states, while a wave of short-selling supports this notion. Blacks Leisure, the UK-based outdoor clothing and equipment retailer announced on Friday it was going into administration, appointing KPMG as administrator. The retailer had given a pre-Christmas warning that no buyer for its assets had been found and that it was “most unlikely that any value will be attributable to the ordinary shares.” Shares closed at 1.25 pence on Thursday.

Meanwhile, last Tuesday data provider Data Explorers released research showing that six out of the 10 most shorted FTSE All Share stocks were retailers. These included fashion retailer Next, and clothing and food retailer Marks and Spencer, which held the unpleasant distinction of being the most shorted stock in the FTSE 100.

The wave of short-selling in the sector suggests that investors do not hold high hopes for the UK high street this year.

“[The situation] for retailers worsened after August," says Chris Chaviaras, retail analyst at Barclays Capital. "The eurozone situation came to a head, triggering fears of a eurozone recession impacting on the UK. Any recession in the eurozone will inevitably have a negative impact on the UK retail sector.”

Dixons shares have also been heavily shorted. The electronics retailer saw a gradual decline in confidence over the course of last year. While UBS felt that concerns over the retailer’s debts were overplayed in June, this did not stop Moody’s from changing the outlook for Dixons’ B1 credit rating to negative last month.

“The shorting is coming from investors betting on Dixons’ insolvency,” says another analyst. “Sales figures are poor, and Dixons has £160 million of debt maturing in November. It would take bad trading figures to trigger insolvency, but it’s possible. However, even if insolvency is unlikely, potential shareholders are likely to be wary. At this stage, Dixons is working for its creditors, not its shareholders.” 

Notable in their absence from the list of most shorted companies were Blacks and entertainment retailer HMV, which has suffered a year of poor sales and speculation over potential takeovers.

“It’s a little surprising not to see HMV high on a list of shorts," says Sam Hart, retail analyst at Charles Stanley. 

" I suspect that the situation there has been going on for so long that there simply isn’t much to gain in shorting HMV shares."

However, debt concerns are likely to feature highly in the share prices of retailers in the coming year. Moody’s figures released in November indicate that European corporate default rates could reach 6% in the coming year.

“Distressed debt is going to be a feature of 2012, investors are concerned about the levels of leverage in retailers and the customers that they rely on are also facing debt issues” says Chaviaras. "Highly leveraged retailers are going to find it harder to refinance their debt this year."

The deteriorating situation can be seen in results put out by Next last week. Once hopeful of a strong performance in 2012, the retailer has been forced to manage expectations of its performance given the negative economic climate and a disappointing Christmas performance. Next chairman Lord Wolfson indicated that the eurozone crisis would eliminate any improvement stemming from lower inflation.

“This can be seen in the results Next put out, which expresses concerns of the eurozone situation leading to a potentially worse-than-initially-expected year for the UK in 2012,” says Chaviaras. "Three months ago, its outlook was that 2012 would be a better year for retailers. With inflation easing, it was hoping for higher consumer spending."

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