The grocers may have been battered by the stock market in 2014, but investors seem convinced they are yet to hit rock bottom.
Analysis of short lending data published by Financial Conduct Authority shows that grocery retailers remain among the FTSE’s most shorted stocks despite plunging share prices since the start of the year.
The data shows WH Smith is the most shorted on the whole market, while Sainsbury’s and Ocado are among the FTSE’s top 10 most shorted stocks.
The FCA requires investors to publicly declare net short positions – where institutions effectively take a bet on a share price falling – of more than 0.5%.
According to this data, the proportion of Ocado shares out on loan last week rose to 5.65%. This represents the highest level of Ocado short-selling since September last year, despite the company’s shares having fallen 36% since late February.
Short selling in Morrisons is also touching its highest point (4.99%) since the FCA started publishing figures almost two years ago, even though its share price hit an eight-year low last week.
WH Smith currently has 10.6% of its stock on loan, while short positions in Sainsbury’s have risen sharply since the start of the year but dipped in the past month from 8.38% to 7.27%.
Further illustrating the negative market sentiment on the prospects for the general grocery sector, hedge fund group Lansdowne Partners last month added to its short position on Unilever as well as shorting Tesco and Morrisons.
Just this week Blackrock has extended its short position on Dairy Crest and Odey Asset Management increased its short position on Coca-Cola HBC.
The primary reason behind these expectations of further share price falls is that the economic data coming through consistently shows that the food sector is not enjoying the same economic uptick seen in most other parts of the UK economy.
On Tuesday the BRC/KPMG retail sales monitor found that food sales, including new stores, increased by just 0.1% over a three month period, meaning that like-for-like food sales are down 2%.
Shore Capital analyst Darren Shirley explained the sound reasons for this grocery doom-mongering: “The grocery market in the UK is a tough place at the moment, with inflation easing, a number of factors depressing demand (e.g. less wastage, more eating out and lower average calorific intake), evidence of gross margin pressure and channel change, which in the main is less lucrative for the incumbents than traditional superstores.”
Average annual inflation as measured by The Grocer Price Index (GPI) dropped to -0.61% as of 1 July, with all big five supermarkets recording negative price inflation for first time in the history of the index.
In this environment, it is difficult to see where top-line growth is going to come from.
Clearly the supermarkets are aggressively expanding into online and convenience to help mitigate the downturn in superstore sales. But this endless quest for growth has seen them expand into even more non-traditional areas – with markedly mixed results (as Morrisons’ disposal of Kiddicare this week attests to).
Despite the heavy share-price falls so far this year (Morrisons is 31% down year-to-date and Tesco has dropped by 14%) this gloomy sentiment is echoed by brokers too. Currently “sell” recommendations outnumber “buy” recommendations on the supermarkets by two to one.
The somewhat discomforting message from the investment community seems to be – however bad things are now, they can still get worse.