Chewy (CHWY): Taking to the #1 Slot on our Best Idea Long List (which formerly belonged to DUFRY). Massive move for us here with CHWY, but we think that the selloff on Friday sets up a great TREND and TAIL long opportunity. While the quarter was on the weak side relative to expectations – especially on margins due to freight and wage inflation – the company crushed it relative to e-comm peers. CHWY +24%, Etsy +11%, AMZN Online Stores +3%, OSTK -6%, Wayfair US -21%. The top line is incredibly resilient here with new customer additions above pre-pandemic levels. We’re one quarter away from seeing an inflection in growth to the upside -- then over 2-3 quarters likely have the catalyst of Int’l launch. The combination of those factors should have a dramatic change/improvement to the narrative around CHWY. After Friday’s carnage the stock is sitting near-trough at 2x Sales. Note that it has been as high as 5.2x, and as low as 1.6x – neither of which it should have seen. On a sales acceleration in 2022 we’re likely to be looking at 3-4x which gets us to $75-$100 over the course of a year, and a 3-bagger over a TAIL duration.
Weber (WEBR): Moving up to Best Idea Short List. The reality is that WEBR was a massive pandemic winner, trends are slowing, margins are under pressure, and while the Street is looking for TAIL EPS to push $0.80, we have it clocking in closer to $0.20. That’s good for a sub-$5 stock vs the current $12. It’s a tight borrow, but the downside here over a TAIL duration is fierce.
Etsy (ETSY): Taking ahead of BBY on our Best Idea Short List. We ‘get it’ that ETSY is a good concept, and better-than-decent company – and is a name we’d like to be long at a price. But that price is about 50% below where the stock is today. The name is trading at 18x EV/Gross Profit – more than 2x AMZN’s multiple – at a time when our math suggests that churn in the core Etsy concept should accelerate meaningfully. So growth is slowing, the company is acquiring its way around the core business, and we think that EBITDA in 2022 will come in ~20% below the Street. For a replay of our September Black Book walking through the ETSY short thesis: CLICK HERE.
See our latest note (ETSY | There Is A Season, Churn Churn Churn). We’re hosting a Flash Call this Friday afternoon to discuss our latest thoughts on the name, and why our confidence has growth short-side.
Kohl’s (KSS): Moving from Short Bias to Best Idea Short. We’re bearish on the apparel space in 2022 – expecting a mean reversion in margins for the retailers like KSS. We’ll take the other side of the recent activist activity around the name. We don’t think KSS will be sold, and we think that the likelihood of spinning off its e-comm business is next to impossible (ditto for Macy’s). The stock looks cheap, but we get to TAIL earnings of ~$4 per share vs the Street at ~$8 – and think that the stock will trade at 8x our number. That suggests a stock of about $32, or ~40% downside from current levels.
Revolve (RVLV): Just a week after going short RVLV, we’re adding it to our Best Idea Short list. We think this is as close to the next SFIX (which we shorted from $80 to its current $19) as we can find in apparel retail. 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 styles 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 in another three years – it’s 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 multiple, 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 was 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 $64 share price.
Driven Brands (DRVN): Adding DRVN to the Long Bias list. We like the automotive maintenance/service market, and DRVN is a newly public player in the space. Private equity has been very active in this space in recent years given the high margins and cash generation of well-run service stores. It’s a fragmented space with high 4-wall profitability for good operators. DRVN is one of those good operators. It provides several auto services, but its core revenue and EBITDA streams are in maintenance (Take 5 Oil Change and Meineke) and car washes, which together are 70% of revenues and 90% of profits. Both of those core segments are industries where DRVN competes with a wide spectrum of competitors from very weak to very strong which are likely to see continued consolidation and profit improvement as the leaders like DRVN take a better operating model to poorly managed boxes or markets. The company uses a mix of owned and franchised operations, with ~80% of locations being franchised making for quality asset returns. Management has put out a target of $850mm in EBITDA by 2026 – which we think is very conservative -- and organic growth including a mid to high teens net income growth CAGR with the company currently at an EV of $7.8bn. However, it’s not cheap at 19x NTM consensus EBITDA. We’re still doing the work here, but our initial take is that the company can meet or exceed the growth targets, and the market is likely to give this a good multiple given the appetite to invest in quality auto services companies in both private and public markets. There’s a de-leveraging story here as well, with the company 7x levered after a big 2020 car wash acquisition and some recent smaller deals. Opportunity for a TAIL duration double or better for the stock.
Purple Innovation (PRPL): Adding PRPL to Long Bias after recent selloff. In our Mattress Deep Dive Black Book (Click Here) we noted that if PRPL traded down into the $12-$13 dollar range we might take a hard look at it long side, and here it is trading at its SPAC price from 4 years ago. We like PRPL as the clear category innovator in a space lined with legacy losers (TPX, Serta Simmons, and SNBR) and think its product differentiation gives the company a clear competitive moat in the face of a secularly challenged industry. Over a TAIL duration we outlined in the black book that while it can be very complicated to execute, if PRPL can continue to raise its ASP as mattress premiumization continues along with develop a multi-channel price point tiering strategy similar to Nike (think the different types and price points of Nikes in Foot Locker vs Kohl's) within both its wholesale and DTC distribution then the company can drive profitable growth overall and avoid channel conflict. This is far from a Best Idea, as we have some major questions we need to get answered about the product segmentation strategy. But the call option is there – and if management gets it right we could see PRPL’s share of the industry go from 4% to 8%. We like the risk/reward long side at $10.
