VVV New Best Idea Long. We increasingly like this name amidst the split of the companies into two pieces – Valvoline Instant Oil Change (VIOC) and Global Products. We’ve argued for a break-up for over two years, and are finally getting it. But like we saw when LB split up, the market is nowhere in the ballpark as it relates to the value creation we’re going to see when the pieces trade independently. We think that VIOC is one of the most defendable models in Retail today – comping double digits, unit growth story, franchising opportunity, and no Amazon competition. We think this business easily gets a 25x EBITDA multiple when it trades on its own. Then we think that Global Products gets a CPG-esque 10x multiple. We think management is working out a transfer agreement to keep as much EBITDA at higher-margin VIOC as possible. There’s also a big call option on seeing a fleet deal done here – i.e. someone like Uber, Lyft, Avis, etc…contracts with VIOC for oil changes and tire rotations. All in, we get to a value of ~$50+ per share, versus $35 today – that’s 42%+ upside with extremely defendable downside support. This name has horrible coverage given its history as a spin out of Ashland – so there are Chemical analysts covering it, along with a few CPG analysts and a smattering of retail analysts. It falls under most radars on the buy side as well. 3 to 1 upside/downside with new-term catalysts in place definitely makes this worthy of Best Idea Status.
BGFV New Best Idea Short. We’re going to go toe-to-toe with the Reddit crowd on this one. Thinking BGFV is the next GME or AMC, the meme stock crew has taken this stock ~90% higher over the last month. Optically, the name looks cheap at 13x earnings, and it’s hated with ~40% of the float short (that’s the last-reported number – current SI is likely lower after the rip). This name was a huge covid beneficiary as the Sporting Goods space became white hot, sales and margins surged, and earnings went up by a factor of 10x. Yes, the company earned $0.43 per share pre-covid, and this year should clock in at ~$4.30. But the major factor that people are forgetting is that Nike fired Big Five as a customer – and Nike accounted for ~20% of BGFV soft goods business, and was a major traffic driver. So BGFV earned $0.43 pre-covid WITH Nike, what do you think happens when it LOSES Nike? We think that next year this company will be lucky to earn $1.50 per share – suggesting that it’s currently trading at nearly 30x earnings. This name should probably trade at about 10x. Could it squeeze higher in Macro Quad 2? Sure. But there will be a major day of reckoning for BGFV in 2022, and with the stock above $40 we’re willing to get in the game.
CURV New Best Idea Short. We initially shorted CURV at $23 in early Sept. The call has worked well thus far. But after hitting $14, the stock has rallied back up to the $18-$19 level, which we think is way too expensive given the existential threats that face this business. The bankers are in love with this name, because Sycamore still needs to sell 75% of the shares outstanding. Recall that Sycamore bought Hot Topic in 2013 for $600mm, and got Torrid as a stub. With its recent IPO – in a banner year for apparel – the stub is now trading at a $2bn EV. The bankers talk about the huge TAM, and underserved customer – but that was a decent call about 15 years ago before everyone in retail started to serve the plus size customer. Now it faces huge threats in the form Old Navy, which is selling EVERY SKU in the store up to size 28 – one of the biggest initiatives in its history. Then there’s Shein, which is a dominating force online that has notable presence in plus sizes. The stock popped recently because people recall the rip on the last earnings when the stock was up 32% on the day – painful short side. Perhaps we’d have half a position heading into earnings in a few weeks – though we’re comfortable making the call now because we’re seeing stepped up promotional activity from CURV at a time when no one else is discounting product. Our full thesis is in the following note (CURV | Shorting Torrid), but the punchline is that we think Sycamore is going to end up selling its stock closer to $10-$12.
OTHER POSITION MONITOR MOVES
RENT: Taking this one meaningfully higher short side – waiting to de-risk strength around post-IPO initiations. This is a broken IPO that priced at $21 on October 27th, traded down on day 1, and currently sits 12% below the deal price. We think that this is an incredibly unscalable business that has no chance of ever growing meaningfully in its core, or ever turning a profit. We were very vocal about taking a hard pass on this deal (for our full thesis, see our note RENT | Hard Pass On The IPO). The reality is that this name reminds us of SFIX (which we still think gets cut in half from here) but even less profitable. Given the heat around the apparel space in ’21 as well as around ‘sustainability’ this name came public at 6x sales. It’s now sitting at 5x, and is likely headed to 2x-3x. The bankers are going to come out defending the name on ‘initiation day’ in another 2-weeks, which is likely a positive catalyst. Once we get that out of the way, this name is likely a Best Idea short.
CRCT: Taking higher on our long bias list after last week’s shellacking. People repeatedly ask us “why in the world do you like this name?”. The answer – we think CRCT has a powerful flywheel and ecosystem in the Arts and Crafts space that is scalable outside of the US, which should take net users higher while margins scale by ~1,000bps over a TAIL duration with EPS power of $2.70 longer term. The only thing holding us back from making this a Best Idea is that the top line is slowing on the margin – but that’s exactly why about 75% of the float is short the stock (in looking at the REAL float after insider ownership). We think its top shareholder has an exit strategy in mind, and would not be surprised to see this company acquired outright. For our thesis and thoughts on recent trends, see our note (CRCT | The Bear/Bear Debate).
ASO: We think Academy Sports is a great pair against BGFV short side. We’re modeling a 10% beat in 3Q and then again in 4Q. ASO’s relationship with Nike is strengthening, while BGFV’s evaporates. The company has solid square footage growth opportunity, is almost completely debt free after being 6x levered under KKR ownership, and we’ve de-risked additional PE stock sales with recent deals by KKR. This is one of the cheapest stocks in retail – trading at about 8x next year’s earnings – with BGFV clocking closer to 30x. That gap should collapse over the next year.
YETI: Removing this from our Best Idea Short list. We still don’t get how and why a cooler company trades at 6x sales, but as we noted last week into the quarter, our patience has worn thin on this short. The quarter reported last week was far from perfect – hence the weakness on the day. But the reality is that for the story to REALLY crack, we need to see the brand break. And that’s simply not happening. The underlying 2-year trends remain steady at about +26% -- and we think sustaining that rate for the next 2-3 quarters is very doable. The name is going to sit on our Short Bias list, however, as we think that TAIL estimates are incredibly unrealistic as it relates to top and bottom line. Over a TAIL duration, our EPS estimates are $1, or about 30%, below consensus. If you’ve got duration on your hands, we’d still be short some of this name. But there will be a time for us to be louder on it.
JWN: With the stock up 22% over the past month – and with the cat out of the bag with the positive DDS report – we’re taking JWN off our Long Bias list. We still think it’s a good recovery play, and think that estimates are going to be revised higher around holiday. But the reality is that like most apparel companies, JWN is likely to see a big mean-reversion in earnings power in 2022. We’ve got TAIL earnings power of roughly $3.50, and it’s tough to argue a multiple better than 10x for a name like JWN. That puts the value about where it is today. We might be getting out a little early as 4Q should beat meaningfully and 17% of the float is short. But this is one of the worst management teams in retail. If there is a way to fail, this team will find it.
TPR: Punting TPR from Long Bias list. This name is up nearly 47% YTD – which is roughly double the S&P. Trends have been good, and the full price selling environment has been stellar for Coach, but Kate Spade and Stuart Weitzman are underperforming. We don’t like making a bet on the extremely mature Coach brand, as upside to top line and margins will be tough to argue. We’re about in-line with consensus after last week’s print over a TREND and TAIL duration, so we’ll book the gain and move on. If anything, we’re warming to the idea of pairing it short side against Best Idea Long CPRI. The growth and profitability differential was notable between the two in recent quarters, and we think that CPRI further extends its lead in 2022. If CPRI hits a bump in the road – which we don’t think it will – then TPR is likely to hit a much bigger one.
