The “sell everything brick and mortar” theme has been playing out on Wall Street for the better part of a decade and the casualties have absolutely piled up, with Bed Bath and Beyond being the latest. In fact, it was this thematic trade that took down Melvin Capital and made GameStop (NYSE:GME), a struggling video-game retailer, a name that will go down in infamy on the Street, no matter how the company’s future ends up playing out. 

The thesis remains and is straightforward – Amazon (NASDAQ:AMZN) and others that make up the e-commerce ecosystem have taken a tremendous bite out of brick-and-mortar retail traffic and sales. A screen of attractive short opportunities based on current technicals, not surprisingly, turned up the usual suspects in this area, and traders should take a closer look as the market is weakening again and the American consumer is facing some very serious headwinds. 

In fact, it has been rather shocking how well household spending has held up amid rapidly tightening credit conditions, rising mortgage rates, a bad year for the stock market in 2022 and record inflation. How much longer can this continue? Will the prognostications of a looming recession come to pass as a result of a tapped-out consumer, with the near-term spark being financial contagion in the banking system? It would certainly seem possible, perhaps even likely. 

A screen of mid-cap brick-and-mortar retail stocks with a current short-interest above 15% turned up a number of unsurprising names, most of whom have sustained significant technical damage in recent months and appear set to move even lower if the much-anticipated pullback in U.S. equities is upon us. Below, we examine two well-known brick-and-mortar retailers that turned up on the screen and delve into the technical and fundamental stories that are driving short-sellers to bet on lower prices heading into the Summer of 2023.  

Dillard’s (NYSE:DDS)

The long-term chart of this semi-iconic fashion retailer may seem a bit surprising, as the stock has been a tremendous long-term performer despite persistent industry headwinds. Dillard’s could just as well be on a list of long ideas. But the near-term technical picture has been deteriorating and short-sellers are targeting the stock with short-interest sitting just above 15%. 

Furthermore, given the broad economic conditions highlighted above, it seems unlikely that DDS would be able to withstand a consumer recession unscathed, not to mention market turmoil and volatility. Dillard’s has surged around 7,400% since its 1983 debut, with a good portion of those gains coming amid a truly eye-opening rally in the stock that began in the spring of 2020. 

In that period of time, DDS has gone from multi-year lows of around $30.00 to close Monday’s trading session at just above $291.00. A cursory review of how that could have happened reveals that sales at the anchor retailer bottomed out in 2021 and have risen since then to $7 billion. 

Furthermore, Dillard’s has done a far better job of converting sales into earnings in the last two years as net income jumped from a loss of ~$71 million reported in 2021 to a profit of ~$862 million in 2022 and then ~$892 million in 2023 – certainly impressive growth. 

Nevertheless, the near-term picture is shaping up in such a way that DDS finds itself on a list of short ideas amid expectations of weakening economic conditions and tightening consumer credit. 

The company’s wildly improved market cap, currently just under $5 billion, may make it even more attractive on the short side after its huge rally in recent years. Year-to-date, shares are down over 8% and the stock made a new low for 2023 last week, prior to a modest rally on Monday. 

Surprisingly, or maybe not surprisingly, this stock is not widely followed on the Street, with Yahoo Finance providing only three analyst estimates for sales and earnings in the coming years. Furthermore, of the three analysts, EPS and sales estimates vary widely, suggesting a lack of visibility – and hence a potential opportunity. 

The consensus, however, is that both EPS and sales will be declining in the coming years. Wall Street has consensus EPS estimates for the current fiscal year of $35.63 vs. $50.81 in the year ago period. 

This yields a P/E of ~8 using this year’s estimates. Next year, the Street sees EPS falling 22% to $27.79. Sales this year are projected to be $6.67 billion and then decline another 1.6% to $6.56 billion in fiscal 2025. 

Obviously, things are not heading in the right direction here, and downside economic surprises could give DDS a haircut in a hurry. Near-term momentum remains bearish, with the stock holding below the 50 and 200-day sma, recording an RSI (14) of 44.29, and a 4% decline for the month. 

At the very least, this will be a name to continue to watch as a long-term support level in the $300.00 area has recently been violated to the downside, making the technical picture even more precarious in the coming weeks. 

GameStop (NYSE:GME) 

Surely, the appearance of the infamous GME ticker symbol will draw many eyes. Is GME iconic? Famous? Infamous? On Wall Street, Reddit, in stock trading circles, and the broader online ecosystem, GME is all of those things, and for good reason! 

Most are familiar with the GME story, and it’s reminiscent of many many other brick-and-mortar retailers – the business has been struggling with a large, unprofitable, and unwieldy portfolio of retail locations that have translated into falling sales and losses for years. 

Nevertheless, even in its current state, GME can still generate revenue - just under $6 billion in fiscal 2023. But it can’t make money. From an economic and corporate standpoint, a miracle would still be required to justify the company’s current ~$6 billion market cap. 

Let’s take a look at the technical picture here and see what the future may hold for the stock.  

GameStop reported better than anticipated earnings on March 22, sending shares gapping up significantly on the news. The price action since, however, has confirmed continued bearish sentiment in this name. 

On that day, after a huge gap, the stock fell throughout the session and closed on intraday lows. The momentum to the downside accelerated throughout most of April, and it appeared as if GME was setting up to take a run at the $17.65 level, where it closed prior to the release of that earnings report. 

Over the last 10 days, however, the stock has found a strong bid and has now re-taken both the 20 and 50-day moving average. On Monday, GME closed the session up another 4.5% to $21.62. In 2022, GME executed a 4-1 stock split, so this equates to a price above $80.00 in pre-split terms. 

Not surprisingly, short interest remains elevated in the name, with nearly 22% of the float being sold short – a somewhat stunning figure given what happened in 2021 and ongoing prognostications of another short-squeeze of even more epic proportions (which appears extremely unlikely). 

The share price has fallen a little better than 6% over the course of the last month and the stock continues to trade well below the 200-day SMA, but momentum has certainly been turning up, although not dramatically. Year-to-date, GameStop shares have now climbed almost 26%, but on the 52-week chart, the stock remains down around 6%.

A short position in GME at current levels would appear risky given the underlying shareholder fundamentals in the name, whereby an army of retail traders continues to be long the stock, seemingly tying up a significant portion of the float, vowing not to sell. 

Nevertheless, valuation remains extremely stretched here using any and all metrics and clearly there are many traders on Wall Street that have not been dissuaded from attempting to make money in the name at the expense of the WallStreetBets crowd. The saga continues…

Featured photo by Michael Förtsch on Unsplash.