Revolve (RVLV): Taking Higher on Best Idea Short list. Putting this one ahead of Best Buy in the #3 spot (behind Wayfair and Etsy). The short has worked by 15% thus far in the month since we added it to our Best Idea short list, but there’s much more downside to come. 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 it's 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 45x PE multiple, 29x 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. 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 $56 share price.
Dillard’s (DDS) | Upping to Best Idea Short List. Two weeks after going short DDS, we’re adding to our Best Idea list. We were long DDS earlier this year, and got off too early, but think it’s time to go the other way. Bulls will make the argument that the company is slowly taking itself private. But then why did it just pay out ~50% of its cash balance in the form of a special dividend instead of buying back its stock? Net cash on the balance sheet today is only $54mm, when we’re heading into a big mean-reversion year for apparel spending – especially in the secularly-challenged department store space. We’d hardly call DDS cheap at 12x earnings – especially with earnings clocking in at an unsustainable 10x pre-covid levels. Only 10% of the float is short today vs 40% pre-pandemic. At $245, we definitely like it short-side. There’s no reason why this name can’t trade at a single digit multiple on an earnings base 50% lower than what we see today. Keep in mind that this stock was under $100 pre-pandemic, and is likely headed back there again.
Torrid (CURV): Taking down from Best Idea list to short bias after a 55% shellacking. We first shorted Torrid on 9/12 at $22 calling for 40%+ downside in a name where the PE sponsor and the Bankers were selling the Street a false bill of goods. The stock is now down 55% from our call 3.5 months ago, and no longer has the downside worthy of Best Idea designation. Taking this one down to Short Bias list. We still think sales and earnings expectations re too high in FY22, and Sycamore is still squatting on 75% of the shares outstanding that will likely be sold on any pop in the stock. Our bias here is still to the downside.
Oxford Industries (OXM). Moving OXM to our Best Idea Short list. How can we NOT be short OXM, the owner of Tommy Bahama and Lily Pulitzer (each account for roughly half of cash flow). We’re extremely bearish on apparel in 2022, and while there’s nothing wrong with Tommy and Lily, the reality is that both brands are overearning this year, the consensus has margins remaining elevated at 15% in perpetuity (closer to 12% is the right number), the stock is trading near a peak multiple on the actual underlying earnings power, and short interest is at a historical trough of 3%. The right earnings power for this company is closer to $5 per share than the ~$8 that the Street is looking for over a TAIL duration. That’s good for a $50-$60 stock vs the current $102 (or 40%+ downside). The bull case here is around the company repurchasing a thin float – but we think in hindsight will prove OXM to be buying back stock at the peak.
Citi Trends (CTRN): Booting long idea after a 40% rip over 2-weeks. Though we like the model long term here as a unit grower under improved managment and think it remains a take-out candidate by one of the larger national off-price retailers, we’re being very selective as to which names with apparel exposure where we’ll stomach long exposure into FY22. At this price, CTRN no longer makes the cut.
Ralph Lauren (RL): Adding to Short Bias list. One of the few names we like in apparel is PVH (the others are GES and TJX) as we think it grows again in 2022 on top of a strong 2021. We view RL as a natural pair against PVH, as PVH is superior on almost every level. The brands (Tommy and Calvin) are more relevant globally, management is far better, and we think that the multi-year growth and earnings algorithm of PVH will easily top RL. That said, they both trade at 9x EBITDA, and we think that PVH will be revalued on higher numbers while RL drifts lower on weaker margins as this calendar year progresses. Not our favorite stand-alone short – hence not on our Best Idea list – but a fantastic pair to owning PVH – a name that we think will more than double over a TAIL duration.
