PetCo Health and Wellness (WOOF): Elevating to Best Idea Long. We’ve been a fan of the TAIL call for WOOF since the IPO, but think that the near-term fundamentals are particularly strong, and the TREND and TAIL calls are aligning. While competitors like CHWY are decelerating, we think WOOF is doing the opposite. This is happening right at the time where we’re entering Macro Quad 2 where smaller cap levered consumer discretionary names like WOOF work particularly well. We’re ahead of the Street by 10% for the quarter and the year, with TAIL estimates 43% above the consensus – largely driven by the outsized contribution from the vet clinics being rolled out in 900 of the company’s stores. We think you get paid on WOOF via earnings growth alone, but the name is likely to get multiple expansion on an upward revision cycle during Quad 2. We think there’s 40% upside to $30 over the next 12-months with very defendable downside support. Click here for full details on our thesis on WOOF.
Sleep Number (SNBR): Elevating to Best Idea Short ahead of our Mattress Black Book this Friday. We think this story is getting stretched over a TREND and TAIL duration. 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 – though on a downward revision cycle we think this name can trade at less than 10x earnings putting $40-$50 in play. Details for our Black Book are as follows:
Date/Time: Friday, October 8th at 12:30pm EDT Add to Calendar: CLICK HERE
Live Video Link: CLICK HERE
Dollar Tree (DLTR): Already a Best Idea, we’re taking this one two-notches higher on our conviction list – ahead of Adidas. We like Adidas’ setup a lot headed into 2022, but the reality is that it is still facing logistics issues around Vietnam plant closures like we saw from Nike, and we think that the DLTR story took a massive turn in a positive direction last week with the announcement of a more concentrated and broad-based breaking of the buck. We think an activist is involved here, but has yet to file, which could also have implications for Family Dollar (and a potential sale to Dollar General), the proceeds of which would likely be used to repo stock. The reality is that the Street is grossly underestimating what the earnings power is for DLTR under a multi-price point scenario. We’re building to EPS of $11-$12 over a TAIL duration, with the Street at $7-$8. If our estimates are right, which we obviously think there are, then it puts a $200 stock in play over a 2-3 year time period – notable with the stock trading at $98. For video link to the Black Book we hosted on Friday: CLICK HERE
Cricut (CRCT): We’re taking this one much higher on our Long Bias list in the wake of getting shellacked (-22%) in the midst of market volatility this past week. As noted last week, 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 80% 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 $27. We’ll continue our work around the TREND and TAIL research call, and are inclined to take this name meaningfully higher on our Position Monitor as we do.
