LAD | New Short Idea -- 50%-60% Downside. Operationally and Financially levered roll-up with unsustainable margins, unattainable goals, negative revisions and balance sheet risk.
BGFV: Taking down to the bottom of our Best Idea Short list. Same bad story we outlined last week when we made the Best Idea Short call, but the first leg of downside came lightning fast – down 40% in the week since our call. This name remains 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 almost 20x earnings. This name should probably trade at about 10x. We’ll take the immediate win on this one, and will look to get heavier on a rally.
ULTA: Adding to Short Bias list. While not a high conviction call into the upcoming quarter on Dec 2nd (the company just hosted an analyst meeting so there likely will be no surprises), the reality is that we can’t not be short ULTA above $400 and at 16x EBITDA – especially paired off against BBWI (which we’re long), where the earnings algorithms are converging, and yet ULTA trades at a 3 turn EBITDA multiple premium. Longer-term, we think ULTA is a respectable business, but one that is in the 8th inning of unit growth and is currently at the highest operating margin it’s ever likely to see. We think that the Target shop-in-shop deal is good for Target, but is questionable for ULTA as it relates to cannibalization. Store productivity is still rebounding post-covid, but the rate of change is slowing materially. We think that ultimately ULTA is worth mid-high-teens EPS rather than EBITDA, and wouldn’t look to own it unless it started with a $2-handle, which is ~30% lower.
HD/LOW: Booting from our Short Bias list. These two names occupied the two lowest slots on our conviction list, and the reality is that the results from both companies last week showed a respectable stabilization in the underlying growth trend. We’re far more bullish on the Home category heading into 2022, as demand in both Home Improvement and Home Furnishings is likely to have a soft landing over a multi-year period unlike categories like Apparel that will likely mean-revert hard next year.
