CAL. Caleres is a name we called out for a big EPS beat last week, and we were certainly not disappointed. The company smoked the consensus, coming in at $0.60 per share vs the Street at break even. The stock sold off by an astounding 12% on the day – typical for this ‘sell the news’ tape. But unlike other retailers like Macy’s that simply burned the furniture and kept paid employees off the floor, we see real revenue strength and lasting cost cuts (mostly in the form of lease renegotiations/terminations) that will be sustainable. For the upcoming quarter, the consensus is clocking in at $0.50, but we’re at $1.19. Clearly, the earnings catalyst calendar is alive and well with Caleres. For the year we’re at $3.68 per share, vs the Street at $1.79. When I say ‘The Street’ I use that term lightly, as there are only two analysts from boutique shops that cover the name. But for next year we’re at $4.22 vs consensus of $2.00. This name traditionally gets a low-teens multiple. Even if we use 12x on out this year number we get to a $44 stock RIGHT NOW or $50 in a year. Am I upset about how the stock reacted last week? You betcha. But am I worried about the earnings trajectory or the stock working? No way. I’m a buyer on weakness. Actually, I’m a buyer…period. Moving this one a notch higher on our Best Ideas List.
ULTA. Taking Ulta Beauty off our Short Bias List. Our TAIL concerns remain, but if anything this looks like a TREND long. The fact is that the company just put up an outstanding quarter. The 65% comp was untouchable – putting up revenue 11% ahead of 1Q 2019 levels. The company was clearly conservative on 2H guidance, which we think set expectations that it will come out and smoke. The Street ended up at $11.82 for the year, which is basically flat to 2019 levels. ULTA is going to blow past that guidance as the reality is that it will benefit from category strength in 2H. Women are returning to work, going out again, attending special occasions, and no longer wearing a mask that covers half of their faces. The beauty category is a clear beneficiary there. We’re coming in at $14.50 for the year, which is 23% ahead of the Street. Do we have huge secular growth concerns here? Absolutely, as we think ULTA is running out of unit growth, and faces secular margin pressures as its post-covid model shifts incrementally to e-comm. But that won’t matter upon reopening. To be clear, we think this name will be re-rated lower once the secular growth pressures are baked into the stock – like, meaningfully so. Ultimately this is a 10% EPS grower, with half of that being driven by stock repo. That’s a far cry from the 25-30% EPS growth we’ve seen from this company over the past cycle. That’s no longer worth 25x+ earnings. Ultimately we think this is worth 18x $15 in EPS, or a $270 stock of about 25% below the current level of $345. We’ll look to short this name on an upward earnings revision cycle in 2H.
PLCE. The Children’s Place gets the award for the most embarrassing and low-ball 2Q earnings revision so for this earnings season (no guidance). The company absolutely blistered the 1Q consensus by coming in at $3.25, when the Street thought that earning a buck was a pipe dream. And for some reason that I would love to really understand, the Street is modeling that the company earns a whopping $0.31 in 2Q. That’s only one tenth of the 1Q earnings level. Granted, the company normally earnings ~25-50% less in 2Q than 1Q…but the Street is being excessive. We’re modeling $2.44 in EPS for the upcoming quarter, which is roughly 700% above consensus. Remember that the company will have closed 300 stores in B and C malls and will have 75% of its business in strip malls an online by the end of this year – a significant permanent change. Getting out of money-losing stores is a permanent positive change, one that puts $10ps in earnings in play. Then you have the company starting to repo shares in 2H which should help squeeze the 23% of the float that’s short. Mark my words, there’ll be a time to short this stock, but it's not til it’s pushing $150 – a far cry from the current $93 price.
WOOF. BofA botched the book on the PetCo equity deal last week, which sent the stock down 8% on the week. We think it’s a buying opportunity. This company is taking a unique approach to the growth in the pet ecosystem – most notably by positioning itself as the fastest growing vet clinic franchise in the country (as it adds 900 vet clinics in its 1500 stores). Growth in vet, grooming and ancillary services should continue to drive a stickier consumer experience and customer ownership for everyday essentials like food, toys, treats and other pet supplies. Our estimates are well ahead of the consensus both on a TREND and TAIL duration. We like this stock up to $35 and think that upwards earnings revisions will get it there. That’s good for 35%+ upside over the course of a year.
Hibbett (HIBB) had another huge quarter reported this week. The company gave another bold guide up revising the year up $1 more than the 1Q beat. HIBB has been a huge Covid winner, gaining share as it remained more open than many competing retailers, and it was a big beneficiary of stimulus dollars both in CY2020 and 2021. On top of the share tailwinds, near term gross margins are abnormally high given mismatched demand vs supply and extremely low levels of markdowns across the industry. The question from here is does HIBB retain the momentum in customer/wallet share it won over the last 15 months? Management highlighted that it does expect some moderation in share gains when lapping JCP and Stage Stores closures in 3Q of 2020. As shopping patterns progress towards a more normal cadence over the coming months, we’ll see if HIBB can hold its position, though the signaled pressure on inventory flow from supply chain disruptions could be a problem for HIBB retaining share. We recognize the company’s effort to adjust the brand message towards more serious sneaker consumers, and that has driven up the Nike ratio to ~65% of purchases, and 70% of sales. Nike will be happy to keep HIBB in business, but it will not let it keep anywhere near the gross and operating margins the company has seen over the last year. Gross margins will not stay above a low to mid 30s range for long, especially in the context of higher online sales penetration, though assuming share gains remain occupancy leverage provides some offset there. For fiscal 2022 (Jan '22) we’re at $9.05 for. Longer term we’re going to be reasonably conservative in our model and say that HIBB keeps the share gains. On a more normalized margin level of 6-7% we could see HIBB Tail earnings power in the $5-$6 range with the company executing some buyback. We don’t think HIBB deserves much above a low DD multiple, so let's call that $60-$70 fair value range, enough risk to keep it on our short bias list. If we get reads that share is being ceded back to competitors, we’ll up this to a Best Idea Short. In that scenario EPS goes to the $3-$4 range and this stock has over 50% downside risk.
Best Buy (BBY) delivered a strong 1Q result as wallet share has largely remained with many Covid category leaders connected to home, especially given 1Q started amidst the peak Covid case rates. Management guided up the year by about $1ps on an 80 cent in 1Q beat citing strength into 2Q to date. Near term sales trends remain strong, BBY is guiding to flat gross margins, while SG&A costs are rising. We think in the coming quarters and years BBY EPS results are likely to disappoint. Our view is BBY was a big demand winner from the spending shift to all things home entertainment, home appliances, and work/school from home. Combined with stimulus it was able to deliver a new peak sales and margin result. As we start to see consumer shopping behaviors mean revert towards services and experiences we expect wallet share to shift away from the home electronics/appliance category. Then BBY also faces the fact that many of the products which were bought in abnormally high quantities this year (TVs, laptops, routers, monitors, appliances, etc.) have very long replacement cycles. This puts the category spend currently at peak and will mean an air pocket for BBY demand in late '21 into 2022. Meanwhile BBY is at new peak margins, which the street has happily modeled into perpetuity. We think margins have to revert lower as the demand falloff coupled with rising wages/SG&A pressures means deleverage on that line. This happens at the same time gross margins are pressured from a shift to higher online penetration that carries higher fulfillment costs, lower extended warranty attachment, and lower credit income attachment. This is why the company is piloting a new membership program called Best Buy Beta, which will bundle warranties and other services into an annual fee. We doubt this membership will get enough adoption from consumers to offset the attachment risk. We’re coming in slightly below consensus for fiscal 2022 with all of the downside in 2H. Looking out to 2023 and 2024, we’re coming in about 20% below the street with earnings at $6.87 and $7.36 respectively. We think a PE multiple around 11x on downward revisions is more than fair, putting 25% to 35% downside on this big cap name. BBY remains a Best Idea Short.
Citi Trends (CTRN) had a great quarter last week, though we already knew it was great, but it was ~10% better than the prelim result provided at $3.23. The company bought back 5.4% of the outstanding shares in just this single quarter. The stock sold off after the print due to the tempered guidance on the rest of the year, and the fact that the company is shifting capital allocation to new store growth rather than share buyback. On guidance we think the company is just being conservative, particularly on the margin line as sales guidance at the mid-point is slightly ahead of our prior model, which was already well ahead of the street. We think the shift in capital allocation is a bullish move. Unit growth investment will likely get better return than buying back stock near the peak. It’s a good time to ramp growth and take advantage of good real estate opportunities in urban areas. With that said, we know this board will be happy to reinstate buybacks if the stock pulls back materially, while still driving store growth. As for forward earnings, management’s 2Q guide is likely bringing down expectations. But management really doesn’t know what the rest of the year will look like, so it’s just blessing where the street was already at, knowing the odds are it can come in well ahead of that. Consensus is underestimating how strong sales/earnings could be in 2H. Back to school should be strong YY, child tax credit payments start mid-July which will be a big help to the CTRN customer, we’re likely at peak consumer savings rates, and there is still potential for more stimmy/government spending bills to support low income urban families. For 2021 we’re coming in 18% ahead for 2021 at $5.75, and have a similar variance in 2022 at $6.30 vs the street at $5.31. We think CTRN’s long term growth is deserving of a multiple of 20x or higher. This is still an underfollowed and under-owned unit growth story that has some of the best growth trends in retail. Over a tail duration we see earnings power of $9 to $10. We’d put fair value on this at $115 to $140 with potential upside to $150+.
