NEW YORK (TheStreet) - Retail stocks such as Vera Bradley (VRA), J.C. Penney (JCP), Lululemon (LULU), National Grocers (NGVC) and Aeropostale (ARO) may be worth taking a look at, as these companies are some of the most-heavily shorted retail stocks (short interest above 15%), a "high" number, according to Wells Fargo Securities analyst Paul Lejuez.
Among the 62 retail stocks within his team's coverage, 14 stocks had short interest of 15% or greater, which is the highest number of companies above the 15% threshold in the post-recession period. Of the 14 stocks with high short interest, those that have been shorted the longest have seen the largest stock price declines.
"It seems the market isn't feeling too confident about retail these days," Lejuez wrote in the note. "Any stock that crossed the 15% short interest level over the past 12 months (11 stocks in total) is still above 15%. In other words, the market is sticking with its shorts. The market seems to be more convinced than ever about which stocks across our retail universe will be the underperformers."
The retail sector has underperformed the broader markets this year, with the S&P 500 Retailing Index down 5.5%, while the S&P 500 is up 6.2% year to date.
On one hand, it shouldn't be surprising when companies find themselves high on the list. They're typically struggling, and either embarking on or failing at a turnaround attempt - meaning that investors have little confidence that while the companies sort themselves out, the stocks will rise.
Short sellers have been betting on Vera Bradley, J.C. Penney, Lululemon and Aeropostale between one and three years. The four stocks' absolute stock decline has ranged from 44% to 77%, as of June 19, when the note was published. The exception is Natural Grocers, which had at first went against the trend with shares rising 72% in the first year after it hit 15% short interest. However the stock is down 49% year to date.
The four companies above have all been - at the very least -- struggling with sales in an environment that hasn't been friendly to retailers of late. Mall-based retailers like Vera Bradley and Aeropostale, for instance, are facing slowing traffic as consumers shift their shopping habits online.
Vera Bradley's stock has topped the charts with the highest short interest in the group at 43% and has spent the longest time with short interest above 15% at 39 months, according to the note. Over that time, the stock has fallen 45%.
Lejuez stated the Fort Wayne, Ind.-based company's turnaround strategy could reduce the heavy short interest. "The company experienced poor reception to new products, strategic mistakes (e.g. introducing too many new patterns, inventory management), challenges with the gift channel, and management turnover," he penned in the note. "In an effort to improve results, VRA hired a new CEO last fall, as well as other senior management team members. ... The new team has quickly implemented several strategic changes in merchandising (expanding the product assortment to new fabrications and styles), distribution (adding new department store partners, and reducing underperforming gift channel customers), and retail (acceleration in new store openings, new store design to come in Q1 2015). We think the new management team is on the right track."
Aeropostale is also part of the teen trio (with American Eagle (AEO) and Abercrombie & Fitch (ANF)) struggling (all are in the list of stocks with high short interest identified by Wells Fargo) due to oversaturation of stores and "intensely promotional" product to lure customers into stores. Aeropostale's short interest is at 28.5%, Wells Fargo calculates. The stock is down 78% since August 2013, when it crossed the 15% short interest threshold.Still first-quarter earnings and sales performance didn't help most retailers.
Company after company reported disappointing earnings numbers and same-store sales that were also below estimates.
"Of the 76 companies in the Same Store Sales index, 49 have reported 1Q 2014 Same Store Sales results. Of these, 45% exceeded their SSS estimates, 2% match, while 53% missed them," Thomson Reuters analyst Jharonne Martis wrote in a May 22 note. "The bulk of retailers are also missing Q1 2014 earnings, and revenue expectations. However, it's important to note that they are still posting positive growth compared to a year-ago. This reinforces that despite really bad weather, retailers still managed to see improvement and growth in their business trends."
Lululemon's short interest is at 24%, according to Lejuez. The company faced a huge recall of its popular Luon pant in March 2013, which caused an executive management shake-up.
The company's missteps which stemmed from not enough oversight in its supply chain, set it back far enough that some observers wonder if the momentum of the brand has diminished indefinitely now that competitors are paving ahead. Since Feb. 2013, when Lululemon crossed the 15% short interest threshold, shares are down 41%.
J.C. Penney is also struggling to successfully exit a turnaround as a result of its former CEO Ron Johnson, who made such drastic changes at the department store chain that it lost its core customer. Approximately 27% of JCPenney's float is held short, and has been above the 15% threshold for 35 months, as shares have fallen 72%, compared to a 51% rise for the S&P 500, he writes. "JCP would have to achieve $1.1B in EBITDA for it to have a similar FY2016 EV/EBITDA multiple as Macy's (M), the clear winner in the mid-tier department store space," the analyst stated.
Despite the seemingly dire straits these retailers are in, there are a few companies that made the list that have proved short sellers wrong. Restoration Hardware (RH), with a short interest at 16%, is one example, he says. Five Below (FIVE) , at 21%, is a second name that is likely to buck the trend, according to Lejuez.--Written by Laurie Kulikowski in New York.