Short Selling Will Plague Retailers Who Fall into These Traps

This past week and a half saw all of The Big Three teen clothing retailers post a second consecutive quarter of year-over-year losses, further fueling the short selling spree on these companies' shares.

Abercrombie & Fitch Co. (NYSE: ANF), American Eagle Outfitters (NYSE: AEO), and Aeropostale Inc. (NYSE: ARO) have been suffering blows to their top line since the tail end of the recession, fueling short-selling activity that has further threatened these companies' stocks.  

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ARO currently has a very steep short float - the proportion of shares held in short positions to the total number of shares floated - of 32.5%, while ANF and AEO are shouldering short floats of 23.1% and 18.7% respectively. This is a relatively high figure given that the most recent short float reported on the S&P 1500, which covers 1,500 companies of various market capitalizations, was about 5.7%

This is particularly disappointing because at one point these three companies were ahead of the curve when it came to teen fashion...

Teen Retail's Shift from Industry Leader to Short-Selling Target

Between 2003 and 2008, teens loved to have the names of these companies prominently adorning the clothes they were wearing. Aeropostale led the pack, averaging yearly growth of 20.9%, whereas both A&F and American Eagle grew at about 16% a year.

Now ARO, which not surprisingly has garnered the most attention from the short sellers, has seen the most struggles. After seeing its yearly double-digit sales growth figures freefall in 2010, the company has failed to pull those growth numbers back up, and in 2013 saw sales plummet 12.5%. This last year was particularly punishing for ARO, which posted its worst year of sales since 2008. It posted losses of $141.8 million.

ARO continued that collapse with two consecutive quarters of year-over-year revenue declines in 2014, with a 12.5% drop in sales in the first quarter and a further 12.7% decline the next quarter.

Similarly, ANF was down 8.7% in 2013 and posted consecutive quarterly revenue declines of 2% and 5.8%. AEO was down 4.9% in 2013 and has thus far in 2014 suffered a dip in revenue to the tune of 4.9% and 2.3% in the first and second quarter respectively.

There are no signs that things will get better for these former retail winners. There are going to be many more joining their ranks.

Here's where these three retailers went wrong - and how to tell when other retailers are doomed to be short-selling targets as well...