Wall Street’s Patience With Retailers’ Turnaround Efforts Runs Thin

Before releasing second-quarter earnings this week, the retailers had raised Wall Street’s hopes that the industry was showing signs of a comeback.

“The expectations were getting higher that maybe things were starting to improve,” said Paul Lejuez, a retail analyst at Citigroup. “But the results didn’t meet those expectations.”

When J. C. Penney announced on July 10 that its chief financial officer was leaving, the company said that it expected to report “significantly improved top line results this quarter versus the first quarter.”

Other glimmers of improvement appeared across the department store industry. Foot traffic in malls was still down, but not as much as in previous quarters. Credit card data, which investors scour for clues about the retail sector, showed more people shopping in big department stores.

That brightening outlook put pressure on a group of investors — mostly hedge funds — that have been shorting retail stocks, or betting that the share prices will fall.

The retail sector is the second most actively shorted industry in the stock market behind the software and internet sector, according to S3 Partners, a financial analytics firm. And short bets on retailers have increased 18 percent since Jan. 1.

Macy’s Tumbling Shares

Traditional department stores like Macy’s have been trying to reinvent themselves. But this week, Wall Street’s patience with these turnaround efforts wore thin, amid a string of unsettling earning reports by retailers.

Short sellers have kept up their warnings. In one recent article, a hedge fund manager compared the fallout of the retail downturn to the collapse of the subprime mortgage market in 2007.

Other investors and industry specialists have dismissed such apocalyptic warnings as overblown. While some of the weaker companies with large debt loads may collapse, stronger brick-and-mortar retailers — not just Amazon — will take market share, these people say.

“This is going to be the best of times for retailers that are well capitalized,” said Burt P. Flickinger III, managing director of Strategic Resource Group, a retail consulting firm.

Then came the actual second-quarter results this week. J. C. Penney said its sales rose in the quarter, but its gross profit margins were far lower than what analysts had predicted.


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