SFIX | Game On -- Again. Taking this name higher on our Best Idea Short list on last week’s rip on underwhelming earnings. The writing is on the wall (and on the balance sheet). We said it when we made the short call at $79, and will say it again now…this stock is likely headed back to its mid-teen IPO price.
Cricut (CRCT): Adding this one Long Side. We came across this name in our ETSY research, as CRCT operates a niche business in the arts and crafts space. The company makes a series of precision cutting machines that cut and stamp virtually any material for the arts and crafts community (30% of which sell for professional use on platforms like ETSY). We initially thought that this name was a short, as the stock is up 88% since its March IPO, and the company clearly benefitted from the boom in crafting during Covid. But that’s the easy (and poorly thought-out) short call – and the reason why 25% of the float is short the stock. The reality is that this is a powerful razor blade/razor model, where the company sells the printer at a low 15% margin, and then sells subscriptions to its users at a 90% margin as well as supplying them with the materials needed to feed the printer at a 45% margin. Unlike ETSY, which we think will see a meaningful increase in churn in its covid cohort, CRCT has the consumer locked-in much the same way that we see at Peloton – which (as strange as this might sound) is one of the closest comps for this business model. Different customer, but similar model drivers. The company introduced its latest printer just last quarter at a $400 price point, which is driving unit sales while WFH is ebbing, other key covid beneficiaries are slowing on the margin, and is doing so at a 50% premium in price point per unit. That builds the ecosystem, and funnels the incremental consumer into higher-margin goods and services. The way we’re doing the math, this company has a roadmap to $2.5bn in sales over a TAIL duration vs ~$1bn today – and will drive an incremental 1,000bps in Gross Margin, which is simply an astounding trend. Ultimately we build to $2.50 in EPS, vs ~$0.80 today. Even if we assume that the multiple compresses by 25% from here, that suggests a $70-$80 stock over a TAIL duration vs its current $30. The name sits on the low end of our Position Monitor, as is usually our process when we find a new idea, but we’ll look to take this one higher either on weakness or as we gain confidence in the near-term research call.
Foot Locker (FL): We’re taking this one off our Long list in the wake of Nike’s disclosure of a $2-$3bn shortfall in revenue associated with footwear plant closures in its quarter last week. We think it’s safe to say that this is largely in FL’s price at $48 – but we’re looking at the model and the bulk of the product shortfall will likely hit FL’s P&L in early 2022 – at the same time it laps the stimulus benefit – which could make for a rocky 1H22. Knowing what we know today, we wouldn’t want to be buying FL unless it starts with a $3-handle. FL looks cheap at 6x EBITDA, but there’s nothing stopping this name from getting to 4x EBITDA on a couple of rocky quarters. It’s simply not cheap enough in the high-$40s given the cyclical and secular risks.
