Making two changes to our Position Monitor this week.
- Removing Designer Brands from Best Ideas and moving to the Bench. We’re still confident that There’s $2.50+ in EPS power embedded in this model, which is notable with the stock trading sub-$15. But we’re admittedly double dipping in the small cap footwear retailer space with both DBI and Caleres (CAL) on our Best Idea list. Our confidence level in the earnings trajectory and upside both near-term and long term at CAL dwarfs our confidence level at DBI – which has fewer cost/lease levers than CAL and is more heavily dependent on reopening in dressy footwear at its DSW concept and at Camuto. Though not a thesis killer, the fact that Nike is giving DSW the boot this fall doesn’t help the comp cadence. Will it be filled by other brands? Sure. No problem. Adidas is particularly active in filling that void. NKE is only about 6% of total sales. But we’re even seeing brand like Crocs, which is white hot right now, restricting flow of product to DSW. In Quad 3, consumer discretionary works, which favors both names, but small cap is a style factor now that simply isn’t working, so we have to pick our battles wisely. And CAL is our primary horse where we’d be putting fresh money to work today, where we think we’ve got $4 in EPS over 12 months and the stock is trading at just $23.
- Moving RH to our Best Idea Long List. This might seem like an odd move, because we’re already the biggest long-term RH bulls on the Street, having ridden the stock since $26 (it’s now at $662), and a TAIL value of $1,700. But we were waiting for an appropriate time with more controversy, perhaps around the complexity of its move into Europe or a slowdown in the US to ‘pound the table’ and move this name back to our Best Ideas List. But we think estimates are low in 2H, and think that the Street is materially undermodeling the impact of RH’s move outside the US – with the opening of RH England in 3Q (i.e. next month). People think that the best model in retail is EDLP, or everyday Low Price. But it’s not. It’s EDHP – everyday High Price. That’s RH. With runway for another 20-30 galleries in the US, and countless luxury markets to open up overseas, this name simply has the roadmap to dominate the global luxury home furnishings market – and it has no peers. So in the end we’re left with $42 in EPS power over a TAIL duration (Street is at $30), 25% EBIT margins, no debt, roughly ~$125 per share in net cash on its balance sheet (in year 5), and 60% cash-on-cash returns in a global growth category where it has no pure-play competitor to speak of, and enormous barriers to entry. The question then becomes what that is worth. All I know is that it’s not the 15x earnings and 9x EBITDA multiple that it currently is sporting on our long-term earnings and cash flow estimates. There’s definitely a host of price discovery to come on this name, but from where I sit a multiple of 30-40x earnings on this type of story is by no means a stretch when dominant players like Nike trade at that level on an average day. LVMH (which should acquire RH, if RH lets ‘em) trades at 36x earnings and 5.7x sales. That multiple on RH over a TAIL duration suggests a $1,200 stock. A 40x EPS multiple gets you closer to $1,700 – or about 26x EBITDA. Get the drift? That’s not in today’s dollars, but it’s in the cards if you want to take a ride with this company as the business model evolves. Even if we discount earnings and cash flow by an aggressive 15% rate (after all, it’s an aggressive plan), it suggests about $900 per share in a year. Not bad with the stock having recently fallen from $720 to $662. The is the mother of all ‘buy on dips’ long-term holding.
