Adding WSM to Long Bias List. We almost never add a name to our position monitor AFTER an earnings event, but the reality is that the consensus numbers for Williams-Sonoma rolled in for the next few quarters and years, and we think that people are still grossly underestimating the earnings power of WSM. Simply put, we think that the ~17% EBIT margin put up by the company is the ‘new normal’. You also can't forget about the cash this company is generating and the repo that will happen as this management team will ram buybacks down the short community's throat. We’re estimating $800mm per year in buybacks that should drive close to $1 per share in incremental earnings. With the sales/demand backdrop so strong and the margin profile of this company in a better position than ever before we end up at earnings for FY21 at an astounding $15.16, vs consensus at $12.98, and the company guidance closer to $13.50. For 2024, the year where we have WSM reaching the stated $10bn target while the street does not have the company reaching $10bn even in 2025, consensus has EPS of $14.45 while we are coming in at $23. We think that WSM will get a 13-14x multiple on that number – which suggests a $300 stock. Discount that back by 10% annually, and you get to 40% upside over the course of the next 12 months. To be clear, our lead horse in this space is still Best Idea RH, which we think has more asymmetric growth drivers and luxury characteristics that protect the growth algorithm if we see a drop-off in category spend. But we’re definitely not averse to owning WSM at $170. We think it gets you paid.
We’re removing ROVR from our long list. We added the SPAC ticker NEBC to the long side in April at $9.89, the stock is up 14% since. We like this business model, though at a rich merger valuation, and the bull case here was around a big ramp in demand and the potential for 2 years of 100%+ growth. That was on track in 1H this year evidenced by the company 2Q results. However, the majority of Rover’s demand comes from overnight boarding and we had seen Rover tracking closely with the TSA throughput recovery this spring as people traveled leaving their pets back home. The R-squared was about 0.8. In the last couple months, TSA throughput growth has stalled, and so has Rover’s interest on google. We think this means we could see a quarter or two of stalled/slowing growth. Since the company has no profit driven valuation support and given how poorly we have seen small cap de-spac’d names trade at times in this current Macro Quad3 environment, the top line really needs to deliver, and the data is lowering our conviction it that. We’re going to take this one off and look for a better price/fundamental setup to potentially get long again.
CTRN had a good week after delivering the goods in its 2Q EPS report. Short interest had risen on the bear view is this was just a big stimulus winner. Stimulus certainly helped, but there are other factors at play. Just look at the CTRN results vs OLLI (which was just a stimulus winner). The core consumer is showing significantly elevated levels of sentiment compared to recent years and relative to other consumer profiles. The business is benefitting from upgraded management over the last couple years. Apparel remains one of the best retail categories in terms of earnings power in the coming quarters, and child tax credit disbursements will continue to support elevated sales levels. The company added an additional $30mm repurchase authorization, so it will be taking the excess cash being generated and stepping in the market to buy should the stock show any undeserved weakness. Updating our model we’ve got NTM EPS at $6.45 vs consensus around $5.50. Tail EPS power of $10+. With the change in market sentiment around small cap we’ll temper our multiple in terms of a fair value today vs back in mid Quad2, but we still see this as at least a mid to high teens multiple given the unit growth opportunity. That means a stock of $95 to $115. We’re staying long CTRN.
