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Soros and Einhorn among those taking small stakes in store operators battling Amazon

Investors including George Soros’s family office and David Einhorn have bought tentative stakes in traditional US retailers, in early signs of a contrarian bet on the beleaguered sector as it battles against the onslaught of Amazon.

Several US retailers that have seen their valuations slide on concerns about the threat of online competition have surged in value since the start of the year. Shares in Target have gained 15 per cent while JC Penney are up by 28 per cent, outpacing a 2 per cent gain for the S&P 500.

David Einhorn’s Greenlight Capital purchased a small position in JC Penney of about 2 per cent of its shares in the fourth quarter, according to US regulatory filings, while Soros Fund Management took a small stake in Target. Element Capital, another hedge fund, opened a starter position in Macy’s.

While shares in certain retailers have started the year strongly, few have managed to outpace the 27 per cent gain for Amazon, which has been the third best performing stock in the S&P 500. Meanwhile other retailers, such as Victoria’s Secret owner L Brands, have continued to tumble, losing 20 per cent since the start of the year.

Many retailers are being heavily bet against by other hedge funds, with large amounts of their shares having been borrowed to sell short, although this has fallen over recent months. More than 40 per cent of JC Penney shares were out on loan in December but this has fallen to 27 per cent, according to Markit data. Short interest in Macy’s has almost halved from 19 per cent to 11 per cent over the same period.

Michael Arone, chief investment strategist at State Street Global Advisors, says retailers are benefiting from signs of strength for the US consumer. “Unemployment is low, wages are starting to accelerate and lower taxes for individuals mean more take-home pay. University of Michigan’s most recent survey of consumers also put sentiment at the second highest point since 2004.”

While the spectre of rising inflation has worried the bond market and knocked stocks off their January highs, Mr Arone said that could be a positive signal for retailers.

“An improvement in pricing power has been a missing ingredient for retailers,” he said, pointing to the latest consumer price index data, which included an uptick for apparel prices.

This week investors will be given further insight into how several large US retailers are faring as Macy’s, Nordstrom and Kohl’s all report earnings.

The U.S. currency was expected to strengthen amid rising interest rates. Instead, it’s down 11% since late 2016.

Stumped by a deepening slide in the dollar, analysts and investors are scouring past periods of U.S. currency weakness for clues to what might happen next.

The U.S. currency has slumped 11% since late 2016 against its main trading partners, including a 2.7% decline this year in the WSJ Dollar Index. That is surprising many on Wall Street, where dollar strength has been anticipated as a series of Federal Reserve interest-rate increases has expanded the yield premium on U.S. Treasury notes over comparable securities such as German bunds.

This yield gap typically is one of the strongest determinants of dollar performance, as higher yields tend to draw capital into the higher-yielding government bonds. That frequently pushes up foreign-exchange values in a cycle that often benefits the higher-yielding currency, as was seen in the years after 2011 when the dollar sharply appreciated at a time of improving U.S. growth.

But it isn’t working this time around. On Friday, the U.S. 10-year Treasury had a yield of 2.87%, compared with a yield of 0.66% on a comparative German bond. The difference, or spread, between those two yields last week reached its widest since the start of 2017, which was just after the spread hit an all-time high.

What’s going on? Some analysts say the dollar is still expensive relative to other currencies even following its recent decline, while others say economic growth in Europe, Japan and emerging markets appears poised for a larger pickup than in the U.S. Others point to parallels with previous periods of dollar weakness, while stressing that those comparisons are made loosely because many economic, political and market dynamics in prior periods won’t apply to this one and vice versa.

Whatever the narrative, it is clear that investors expect the dollar rout to get worse. Hedge funds and other speculative investors are holding roughly $8 billion in bets against the dollar, according to Commodity Futures Trading Commission data, and $19 billion in bets that the euro will strengthen.

“People are a bit unclear about why the dollar is not benefiting from U.S. yields that have been moving up so fast,” said Sireen Harajli, a foreign-exchange strategist at Mizuho Bank. “I think that’s because of concerns about the U.S. budget deficit.”

Analysts at Capital Economics say the dollar’s current slide “is reminiscent of the mid-2000s,” when the currency fell significantly even as the Fed raised U.S. interest rates. The culprit then, and perhaps now: market expectations of increasing deficits in the U.S. government budget and the nation’s trade account.

Wider U.S. trade deficits have been a common thread in dollar bear markets. The dollar’s sharp decline in the 1970s came as the U.S. moved from a trade surplus to a deepening trade deficit, along with the collapse of the gold standard and a decadelong battle with inflation.

In the 1980s, a seven-year dollar rally again raised concerns about the U.S. trade deficit, which was distorting trade balances in Europe and Japan. The governments of the U.S., Japan, West Germany, France and the U.K. in 1985 signed the Plaza Accord in a bid to weaken the U.S. currency.

There are pluses to the dollar’s decline. Its strength in recent years weighed on exports by making U.S.-made goods less competitive abroad, hitting corporate profits at multinational firms. A strong dollar also can threaten emerging market economies by making their dollar debts more expensive to pay back.

Italian luxury brand working to maintain run of soaring sales under star designer Alessandro Michele

MILAN, Italy—Gucci is in the midst of a boom shadowed by the threat of a bust: fickle shoppers falling out of love with the Italian fashion house as quickly as they embraced it.

Gucci has been on a tear since it hired creative director Alessandro Michele three years ago. Sales have risen nearly 80%, hitting €6.2 billion ($8.1 billion) in 2017. Operating profit has more than doubled to €2.1 billion. Mr. Michele’s kaleidoscopic designs—which mix colorful streetwear, historical references and garish animal prints—have been praised by critics and scooped up by shoppers from New York to Beijing.

Last year, Gucci passed Hermès, the fashion house known for its high-priced handbags, to become the second-biggest luxury brand by revenue, behind only Louis Vuitton. The brand is flaunted by celebrities and generates unrivaled buzz on social media. “Gucci Gang,” a single by the 17-year-old rapper Lil Pump, hit no. 3 on the U.S. charts last year.

Yet the boom has led analysts and investors to worry Gucci risks becoming a victim of its own success. As sales continue to grow and other brands increasingly ape Mr. Michele’s designs, they fear Gucci could become overexposed.

“Consumer loyalty is very fickle,” says Luca Solca at Exane BNP Paribas. “There’s a scenario down the road that Gucci is seen too much.”

Gucci executives say they are taking an array of measures to prolong desire for Mr. Michele’s designs. To protect the exclusivity of the brand, Gucci has ended sales in its stores. Discounts are only available in the brand’s handful of factory outlets—and only a year after the end of the season in which the clothes first appeared.

But Gucci is also betting that its star designer can develop iconic products that defy fashion’s boom-bust cycle. That is how Louis Vuitton and Hermes manage to sell leather goods, even when fashion trends suddenly turn. Executives say Mr. Michele has developed some products that continue to power the brand three years into the designer’s run. They include the Princeton slipper, the Ace sneaker and the Dionysus handbag.

“People started to question the longevity of the growth already 12 months ago,” Gucci CEO Marco Bizzarri said in an interview. “We keep improving our business and our success.”

Gucci is no stranger to sudden shifts in consumer tastes. The brand ruled the catwalk in the 1990s when designer Tom Ford was at the helm. Revenue grew under his successor, Frida Giannini, but toward the end of her tenure, the brand’s sleek styling had lost favor with shoppers.

Under Messrs. Michele and Bizzarri, Gucci rolled out an instantly recognizable look well-suited to generating buzz on social media. Mr. Michele’s use of pop culture logos has made his designs a favorite for fashion-savvy Instagram users. Gucci “provides Instagram heaven,” says Helen David, chief merchant at Harrods, the upscale London department store.

The brand consistently rates as among the most mentioned luxury brands on Instagram, according to Tribe Dynamics, which tracks social-media buzz.

Gucci CEO Marco Bizzarri

Gucci CEO Marco Bizzarri PHOTO: TRISTAN FEWINGS/GETTY IMAGES

At this week’s Gucci fashion show in Milan, Mr. Michele’s models wore trench-coats and sweaters emblazoned with the logo of the New York Yankees. Others donned knitwear versions of a medieval executioner’s face mask. Photos of the show posted to Gucci’s Instagram account garnered hundreds of thousands likes.

“Fashion has followed him,” says Jeffrey Kalinsky, director of designer fashion at Nordstrom. “I don’t know why that wouldn’t continue for a very long time.”

The challenge now facing Gucci is to convert that buzz into appeal that can endure across fashion seasons. Gucci is already investing in store renovations that seek to enshrine Mr. Michele’s status. Sleek minimalist interiors are being replaced with lush décor that reflects Mr. Michele’s flamboyant aesthetic.

Executives say the renovations have produced sharp increases in revenue at the stores where work has been completed—so far only 152 of Gucci’s 529 stores world-wide. Rolling out those renovations across the network should deliver a significant jolt to revenue, executives say.

By creating “continuity” between Mr. Michele’s collections, Gucci aims to insulate the brand from the volatility of ready-to-wear fashion, François-Henri Pinault, the French billionaire who is chief executive of Gucci’s corporate parent, said at an earnings presentation this month.

“There isn’t a ready-to-wear bubble at Gucci,” Mr. Pinault said.

- Ion Trading, FIS and SS&C still seen integrating deals

- FactSet bid logical, though size a possible hurdle

Potential rival bidders for financial technology group Fidessa [LON:FDSA] may be hampered by capacity constraints and pre-occupation with already signed deals, three industry bankers following the situation said.

Activist Elliott Management disclosed a 4.8% stake in Fidessa on 21 February, following a GBP 1.4bn approach by Swiss peer Temenos [SWX:TEMN]. Elliott reportedly believes other buyers could gain greater benefits from a deal to buy the UK provider of trading technology.

The activist has been contacting a large number of advisers to find a rival bidder, the first banker said. At the top of Elliott’s list of ideal purchasers is likely to be Ion Investment Group’s Ion Trading as it can extract good synergies from a combination, this banker said. Ion provides software for financial institutions and banks.

However, Ion has recently made acquisitions that could mean another sizeable acquisition is unlikely, this banker and a second said. Ion announced a USD 1bn purchase of Openlink Financial, which provides software for trading and risk management, on 2 February.

Late last year Ion also spent an undisclosed amount on a controlling stake in financial content and analytics company Dealogic. Ion did not respond to a request for comment.

FactSet Research Systems [NYSE:FDS] is another potential bidder, the bankers said. The two companies would be complementary, with FactSet being buyside-focused and Fidessa primarily serving the sellside, the first banker said. The companies have overlapping customers and there would be a lot of cross-selling opportunities, a fourth banker said.

Factset has not done big deals in the past, and could be challenged by Fidessa's expensive valuation, the second banker said. The Temenos deal values Fidessa at 14.6x EBITDA. He added that Factset will have to decide if it wants to move into the sellside, and if it wants to pursue a large deal rather than finding a smaller target.

Factset declined to comment.

Potential bidder FIS [NYSE:FIS] is still integrating its largest purchase, financial software provider Sungard, the first two bankers said. Financial services software and services provider SS&C [NASDAQ:SSNC] announced an acquisition of DST Systems [NYSE:DST] on 11 January, and Vista Equity Partners combined major financial technology companies Misys and D+H last year to form Finastra.

Temenos seems to have timed its bid for Fidessa very well for this reason, the first banker said.

On the other hand, Fidessa has been known to be open to a sale for several years, giving other bidders ample opportunity to come forward, this banker said. More recent takeover interest in Fidessa may have been ignited by the sale of electronic trading provider Ullink in November 2017, the third banker said.

Temenos has also offered a good price for Fidessa, at a 37% premium, the second banker said. Temenos has the capacity to increase its offer, so any rival would have to be prepared for a possible bidding war, this banker said.

Temenos and Fidessa declined to comment.