DUFRY | We view DUFRY at CHf48 ($5 US ADR) as the most compelling risk/reward on our Best Ideas Long list. Though we don’t think the company is going to smoke numbers on Tuesday morning, the 28% draw down since the Delta variant/travel concerns exploded alongside a +5% tape simply has too much bad news in the stock. We think that the US business is trending better than expected (~25% of total), as is Asia (~10%) but that Europe remains a drag on the business – which is no surprise to anyone watching the COVID current events – even though recent datapoints out of Europe (~45% of sales) have been encouraging. We think the company is going to impress the Street by being ahead on cost-cuts, which is one of the biggest pieces of push back we get – that European companies can’t be held to cost cutting goals. People are underestimating the costs taken out of the Hudson operation in the US, and the duplicative functions taken out of the back office in Europe and Central/Latin America. Importantly, the company is likely to stick with its revenue scenario analysis laid out 13-weeks ago for the year – while the concern we’re hearing from investors is that the company will cut it. We simply don’t think that’s the case. We think the Street is still too conservative in not expecting a full recovery for another 5-years. We think we’ll see a full recovery by 2023, on an EBIT margin double pre-pandemic rates. There’s your first paycheck. Then you get your second paycheck on the Hainan JV with Alibaba, which we think is running ahead of schedule. That gets you paid by another CHf165mm, (1.50 per share) once the JV kicks into high gear in 2023. With the meaningfully higher margin profile comes the cash…and we think that the company will take out 15-20% of its share count over a TAIL duration – that is, unless it continues to consolidate the 88% of the industry it does not control. But at today’s price, I think that the only acquisition that matters is an acquisition by LVMH or KER of DUFRY. If it’s a standalone company at this price (or lower) on a year’s time I’ll be surprised. Ultimately by year 5 we’re looking at CHf12 in earnings power. Give that a 20x multiple (prev peak was 18x, but now it will be a more profitable, higher margin and better capitalized company with higher returns) and you get a stock that’s CHf240 that compares to its current price of CHf48. That’s a 4-bagger for you, at a time when we’re at peak variant ‘freak out’ sentiment. If you own the ADR, you’re talking a $5 stock going to $21. A BIG idea, to say the least.
LB/VSCO/BBWI | LB is coming off the Best Ideas List with the new VSCO and BBWI both going to the Long Bias list. When we went long LB in January the rate of change, earnings upside, low sentiment/valuation, and pending separation catalyst made this a clear best idea long. The stock doubled, the street sentiment is currently the most bullish it’s been in over 5 years, and with the ultimate catalyst now behind us the risk/reward no long supports best idea status. With that said, both of these names are staying on the long bias list as we see upside in numbers and the multiples over the coming 3-6 months. We’re bullish on apparel here in summer/fall 2021, which will likely benefit VSCO, and we expect a continued shift back to B&M shopping, which means traffic to the shopping centers where both of these banners are located… few concepts can turn foot traffic into sales like BBWI. We think the stocks could see another 20%-30% on strong mid-year business trends before we have to start to think about the risk of steep comparisons in 1H2022. We think a fair value range on these names remains $21bn to $24bn for BBWI, $5.5bn to $7bn for VSCO, which they currently fall in or just on the low edge of. Still long, but the rate of change and catalyst setup just is not what it was prior to the separation. Now it relies on further EPS revisions and the market sentiment on a multiple. The latter of which is tougher to rely on with a transition out of Macro Quad2.
PLBY | It's Game Time. We think the quarter is in check, and management will go on offense with messaging around the transformation. Best Idea Long. Click link for our full note on what to expect from PLBY on Tuesday.
