ThredUp (TDUP): Taking up materially on our Long list. The stock is down 15% since we first added TDUP to our long bench, and the reality is that the fundamental story has improved – with business accelerating based on our checks as the September quarter draws to a close. The stock has been weak as the company made a rookie mistake and pulled forward the lock-up such that sponsors could sell right in the middle of the quiet period. We think that gave the market the impression that the company was going to tank the quarter in the face of a new supply of shares. But as noted, we think the opposite is taking shape fundamentally, and that the company is on track to beat the quarter. This is a Best Idea Long candidate once we de-risk the lockup. See our note outlining the fundamental call. Going Long TDUP
Stitch Fix (SFIX): Taking SFIX down to bottom of Best Idea Short list. This short has worked like a charm – down 55% since we made the call in Feb at $79. We remain extremely confident in the TAIL short call, that this company has completely run out of profitable TAM – and is going down the path of destroying its gross margin structure as it competes more heavily for the marginal and unprofitable customer. That said, the stock has been particularly weak of late – since the memo surfaced from the COO to the employee base that ‘we can and must do better’. There’s a lot of bad news in this stock, albeit justified, though we can’t ignore that this is one of the strongest quarters we have seen for the apparel space in a generation. If there was ever a time for SFIX to beat on spending per user and/or Gross Margin, this is the one. The could go either way on the print – per the Hedgeye Risk Range it’s oversold around $30-$31. Squeeze level would be to TRADE resistance $41.92. Today it’s at $35.50 – right in the middle of the range. We wouldn’t press this into the print. If it pops, we’d short more, as the name is ultimately headed to the teens over a TAIL duration. It got cut in half once, and should be cut in half again.
Sleep Number (SNBR): Gaining confidence short side – taking higher on our short list. The company continues to discount its product heavily based on our mattress pricing tracker, while other mattress companies reduced promotions after the traditional Labor Day promo period. Not a good sign relative to competition near-term. Over a TAIL duration, we think this story is getting stretched. The company sells through its own retail stores, and is currently clocking in with a fleet of 621 stores. The company is already in all the locations near the consumer that can spend $4,000-$5,000 on a mattress, and we think it should be reducing as opposed to adding to its store footprint. As such, we think that productivity per store will be under pressure after this year, where the company is clearly benefitting from a strong housing market – like other categories related to the home. We think this a peak earnings year for the company at ~$7 per share, and will revert to $5.50 next year, while the consensus is looking right through slowing demand, competitive pressures, weaker store economics, and pressure on wage, freight and raw materials. In fact, the Street is looking for $8-$9 in EPS over a TAIL duration, while we think best case is $5. Note that pre-covid, this company earned $2.70. If anything, our model is optimistic. Put a 12x multiple on $5 and there’s a $60 stock -- well off of its current $95.
