Guess? (GES): Going Long GES, with ~50% upside over the course of a year. While we’re generally averse to the apparel category in 2022, we think GES will be one of the few names that will show meaningful earnings growth throughout the year. Half of the outperformance vs peers is the result of its high exposure to Europe, which we think accounts for about 70% of segmented EBIT. Like TJX and PVH – two other beneficiaries of a latent reopening in Europe, we think this part of the business will drive both the top line and margin equation next year. The second part of the story here is management incentives – which are squarely aligned with shareholders. Simply put, CEO Carlos Alberini (former co-CEO of RH) is granted 600,000 shares of stock in four tranches based on the stock hitting certain thresholds – with the first quarter granted if this is a $35 stock (50% upside) by June of next year. That’s a cool ~$2.6mm, and we think that management will reverse engineer top and bottom line to hit the compensation targets. As it relates to management quality, we think that Alberini is in the top decile of retail CEOs. He laid out a 5-year plan in 2019, and has already hit it during 2021. We think we’ll see the articulation of a new plan with more robust profitability and return metrics, which management will likely over-deliver on – again. Over a TAIL duration, we build to $5+ in EPS power (including de-levering and stock repo), which suggests that the stock is trading at just 4.2x underlying earnings and 3.5x EBITDA. As an important frame of reference, Alberini’s restricted shares vest in June of each year starting in 2022 at prices of $35, $40, $45, and $50, respectively. We think this one is a double over a TAIL duration.
Academy (ASO): We’re elevating ASO to a Best Idea Long. We like this name into earnings this week. There is a lot of negativity priced in after the recent selloff. The stock is trading at 7.3x consensus NTM EPS, and we think consensus is still 5%-10% too low. Category demand reads remain strong both on reports by DKS and HIBB, as well as some early data points around holiday sales so far. Sporting Goods should be a top performer for holiday with a healthy consumer. Sporting Goods has also historically done well in Macro Quad1. ASO is still trading at about a 25% discount to DKS yet we’d argue ASO has better unit growth potential, accelerating cash return optionality with a transformed balance sheet, quality exposure to net migration, strong management, and the KKR ownership overhang is gone. The multiple gap should close here and that likely means ASO trading up from here. Both ASO and DKS have signaled that gross margins are likely to remain above pre-covid levels and we tend to agree, though there will likely be some earnings reversion, so we’re at $5.88 next year. Still a fair value on this name is likely in the $60 to $65 range, or about 50% upside from current levels. If the stock stays down here we’d expect the company to pursue a sizeable buyback plan.
Stitch Fix (SFIX): Taking down to the bottom of our Best Idea short list ahead of Tuesday’s print. The reality is that this is one of our biggest wins on the short side in recent years, making the call in February with the stock at $79.62 that the stock was headed back to its broken IPO price. Just 10 months later the stock is sitting at $23 – just $8 above its IPO price. We still think this stock is headed to $15 – which is good for another 35% downside. But the reality is that in anticipation of the launch of its Freestyle program (Direct Buy) SFIX loaded up on inventory at the end of last quarter, which is likely to drive outsized top line on the print to be reported Thursday. To be clear, we think that will come at a lower gross margin, and a significant erosion in operating asset turns – both of which are thesis validators that this model is evolving into nothing more than a less premium version of Nordstrom.com as opposed to the stylist and AI-curated subscription model that made it profitable in its early days. We don’t think this model ever sustainably earns a red cent, and will continue to disappoint, and get revalued lower until someone takes it out for the value of the AI well below $15 per share. We’ll press it on a Q1 (quarter ended October) Revenue beat.
Revolve (RVLV): Going short RVLV. A client asked me last week “hey, I want your next SFIX.” Well…RVLV might be it. This business model originally started out as an influencer-led online model of heavily curated limited runs of exclusive product that sold out quickly and profitably to a fashion-forward customer. Now its evolved far past its TAM and has MASSIVELY over-assorted its merchandise offering, and like SFIX, is becoming an online version of a department store. Just check out the number of SKUs on the site – the numbers are staggering. No longer are the fashions exclusive, in limited supply, and make the consumer ‘have to buy’ at risk of missing out on the on-trend outfit. Unlike SFIX, to its credit, RVLV is a profitable model. But that means that people can’t blindly slap on a nosebleed EV/Sales multiple and have to look at real metrics like EPS and EBITDA. That’s where the stock falls apart. The company is likely to earn about $1.15 this year – but it another three years – its still likely looking at well under $1.50. The company is over-earning on the gross margin line today by about 300bps, and continues to spend heavy on SG&A to drive brand relevance with its core customer. Not exactly a growth company when you look at profitability. The name is currently sitting at a 55x PE, 35x EBITDA multiple, trough short interest at 12% (was as high as 85%), and the Sell Side overwhelmingly positive on the name with 80% buy ratings. The only thing holding us back from making this a Best Idea is that the stock sold off by 24% over the past month – high beta name that got clipped with the retail/consumer sell-off. But this name is egregiously expensive, overloved, and likely worth a mid-teens PE multiple, suggesting a stock well below $20 over a TAIL duration – a fraction of the current $66 share price. This is DEFINITELY a solid Best Idea Short candidate on either a bounce, or as we get more confident in near-term timing.
Amazon (AMZN): Taking meaningfully higher on our Best Idea Long List. In all our years covering this name, we’ve never been more confident in the setup heading into the upcoming year. The company has rebased revenue and profit numbers two quarters in a row. It’s facing abnormal cost pressures that should subside in the coming quarters as cost pressures moderate, and the company is ramping spend in the face of slowing revenue and rising industry costs. Those sound like negatives, but it means the company likely just set the expectation of trough revenue and profits on the rate of change. Forward outcomes relative to expectations favors the upside. We are about 4-6 months from easing compares, and the company is investing when it should, which is when the competitors are getting complacent with recent success and the industry is starting to see slowing revenue pressure. Within 6 months competitive intensity will ramp as sales are tougher to come by, and Amazon will be positioned to take massive market share having boosted CapEx to new all-time highs (over 14% of sales at $15.7bn this Q). That share gain makes for an outsized revenue acceleration 3 to 4 quarters down the road. The new CEO is taking the brand further into consumer experiences in sports and gaming while continuing growth in every other business unit driving share of wallet higher. Action on big tech giants by law makers might be a risk, but Amazon is not at the top of the list as it relates to regulatory action. If there is future action, it would likely involve a forced breakup, which might actually be a positive for equity value. Rolling out NTM estimates 1 year, we see 30%-40% upside over 12 months for this uber mega cap name with strong downside support – and notable that it historically is an excellent Quad1 stock.
