Many retailers have struggled over the past few years thanks to tough competition from e-tailers and slowing brick-and-mortar traffic. Some stronger retailers survived by closing stores, cutting costs, and investing more heavily in digital channels. Others flopped as they drowned in their own markdowns.
Investors can gauge how bearish the market is about certain retailers by checking the short interest, or the percentage of their shares being shorted. Let's take a closer look at three retailers with the highest short interest in the market, and whether or not the bears are right.
42% of JCPenney's (NYSE:JCP) shares were being shorted as of April 10. That's a very pessimistic outlook for a stock that already dropped nearly 50% over the past 12 months.
JCPenney once thrived as a low-end department store anchor in malls across America. But mall traffic dried up, and JCPenney struggled to compete against e-tailers like Amazon, superstores like Walmart, and fast fashion retailers like Inditex's Zara.
In 2011, JCPenney hired former Apple executive Ron Johnson as its CEO. Johnson tried to rebrand JCPenney to attract new shoppers, but the strategy alienated its core shoppers instead. Sales plunged, and the stock shed half its value by the time Johnson was fired in 2013.
Current CEO Marvin Ellison tried to turn JCPenney around by beefing up its home improvement department, adding more store-in-stores for popular brands, and investing more heavily in e-commerce initiatives. Unfortunately, JCPenney still relies on using markdowns to drive its sales, and its cash is drying up at an alarming rate.
Analysts expect JCPenney's revenue and earnings to slide 3% and 18%, respectively, this year. Those are dismal growth figures for a stock that trades at 17 times forward earnings.
Under Armour (NYSE:UA) (NYSE:UAA) was once hailed as the "next Nike," but 37% of its class A shares were being shorted as of April 10. Both classes of the stock have stumbled more than 60% over the past two years.
The bears pounced on Under Armour for three main reasons. First, the bankruptcy of Sports Authority in 2016 flooded the North American market with excess inventory. UA, which was already struggling to stand out in a crowded market, had to cut costs to remain competitive.
Second, the resurgence of Adidas (NASDAQOTH:ADDYY) -- fueled by the popularity of its "retro" designs, UltraBoost foam-soled running shoes, and celebrity-designed shoes like Kanye West's Yeezy -- took a bite out of UA's North American sales. Lastly, new flagship shoes like the Curry 4 failed to impress fickle shoppers.
Wall Street expects UA's revenue to rise 3% this year, but for its earnings to slide 11%. Yet its class A shares still trade at a whopping 56 times forward earnings, while its class C shares have a forward P/E of 37. It's no wonder that the bears are still drooling.
GNC's (NYSE:GNC) business of selling vitamins and nutritional supplements at brick-and-mortar stores worked well for decades. Unfortunately, warehouse retailers, superstores, and e-tailers started to render GNC obsolete. In recent years, a series of lawsuits questioning the ingredients of its products tarnished the brand's image.
That's why GNC's stock lost nearly 90% of its value over the past two years, and why 36% of its shares are still being shorted as of April 10. The stock looks ridiculously cheap at less than 5 times forward earnings, but that's because analysts expect its revenue to slide 3% and its earnings to plunge 37% this year.
GNC believes that an overseas expansion (particularly in China), the expansion of its loyalty program, and a partnership with Amazon could get its business back on track. However, those efforts probably won't lure enough shoppers away from other retailers that carry similar products along with other goods.
The bottom line
The bears have sunk their teeth into JCPenney, Under Armour, and GNC, and they won't let go anytime soon. Each of these retailers has fundamental problems which can't be easily solved.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.