We originally made the Long call on PLCE on 1/18 with the stock at $57.27 calling for +60% upside. As of today, PLCE hit $92.05, notching a +60% gain. Process says that it worked for the right reasons, so we cut bait, and book the gain/win, and move on to better opportunities.
But I'm not gonna do that.
‘Thesis morph’ is one of my hugest pet peeves in the investing world. Being married to an idea just because it's working is toxic, and capital destructive. But the reality is that I'm sticking with this idea as a solid Long Bench name, as I think there's far more earnings gas in the tank than the consensus is likely to come out modeling for this year and next.
We're taking up out EPS estimate for this year from $6.25 (with the Street pre-print closer to $4 bucks) to an even $9 per share, while the Street is likely to land somewhere between $6ps and $7ps.
The crux of our call all along has been that capacity has come out of the kids space over the past four years at the same time PLCE has been walking way from -- ie closing -- marginal distribution such that the ‘dinosaur Mall’ is close to zero percent of the portfolio by the end of this year. 25% of sales are in high quality B malls, with the remainder in A malls. The remaining 75% is permanantly split between e-comm and strip malls -- a far better place to be in competing in this space.
The fact that the stock was up only 5% on the day was borderline shocking given that the company printed 80% of the full year estimate in a 1Q alone. This was the best retail print this quarter, by a wide margin. AUR trends are absolutely killing it, and this is anything but a one-quarter phenomenon. This lasts 1+ years…with slow mean reversion.
An important distinction here is that companies like Macy's, Dillard's and Kohl's are printing MONSTER 1Q numbers, but will see a 60-80% negative reversion towards a more normalized level in 2022. PLCE is the opposite. These trends posted this quarter simply raise the bar for next year -- and while comp growth will moderate and gross margins will likely feel more discounting pressure, the SG&A saves are permanent.
On top of that, we have the company paying off a note next quarter, which will allow it to reinstate its dividend, and begin to repurchase stock once again, which adds to next year's EPS algo.
The punchline here is that PLCE has flirted with $10 in EPS power more times than I care to admit. And it's always failed to cross the goal line. The Street is right to be skeptical. But this time it's the result of real structural changes to the business and the competitive landscape. We're at $10.10 in EPS next year, which is likely to be 20-30% above the Street once we see where numbers come in over the next few days.
Would we call this a Best Idea here? No. Much of the call has already worked. But if you own it, keep owning it. Remember…retail stocks – especially volatile ones like PLCE – always go a hell of a lot higher (and lower) than people think. There are more shorts to squeeze here (24% of the float is short), and 12x a $10+ EPS number next year gets us to 30% upside from current levels. The call option is that it hits that $10 EPS this year, not next. This time, the $10 EPS mantra ceases to be a myth, and proves the naysayers wrong.
