Making meaningful changes to our Position Monitor this week, with four new tickers – geared to the short side. GRPN is our lone new Long Idea. DTC, BOOT and CROX new shorts. Taking higher quality names like NKE and AMZN higher long side, which should accelerate earnings growth while the rest of retail decelerates/misses. Ditto for DRVN. Getting more bearish on pandemic winners like DKS. All in we’re making eight actionable Position Monitor moves, which we think are money-makers TODAY.
On Wednesday January 19th we’ll be presenting a Black Book where we triangulate Consumer Spending puts/takes across a TAIL and TREND duration with Retail Sales by Category, and Consensus Expectations, and then overlay Hedgeye Macro Team’s Quad Outlook for 2022. The timing of consumer inflows/outflows during the pandemic is critical here from both a top down and bottom up perspective. Be very careful what you own right now in retail, and just as importantly, when you own it.
If there’s one presentation of ours you listen to this quarter, make it this one.
For Our Invite Note: Click Here
Date/Time: Wednesday, January 19th at 10am EST Live Video Link: Click Here
CHANGES TO LONGS
NKE (Nike): Moving way up to the #2 slot (from #8) on Best Ideas Long list. Sales should accelerate throughout CY22 (FY23) as supply chain/production bottlenecks clear up, and the company can satisfy the demand being driven by exceptional brand heat. We think that China revenue will recover much faster than the consensus thinks, and ultimately are 20% ahead of consensus for the next two quarters, and 15% ahead next year. Ultimately we build to 20% margins over a TAIL duration, due to outsized revenue growth and an incremental shift to DTC, which is much higher margin for Nike than selling through traditional wholesale. We think that’s good for $7.50-$8.00 in EPS power, with the Street at $6.50. With the higher EPS base comes a higher multiple, or $250-$300 over a TAIL duration vs the current price of $148. This is one of the better retail/discretionary names to own in Macro Quad4.
AMZN (Amazon): Taking Amazon higher to #4 slot on Best Ideas Long list. Three main drivers behind our increased bullishness on AMZN. 1) Bullish inflection in e-comm sales vs Brick & Mortar expected by May of this year. 2) AMZN has been investing in its model to take share while competitors have pulled back on Capex and SG&A. It’s going to bring the thunder on the top line in 2022 regardless of industry-wide positive backdrop for e-commerce. 3) Big cap quality like AMZN is the kind of ecommerce you want to own in Macro Quad4. Our sum of the parts model on AMZN’s seven primary businesses gets us to $4,700 stock in a year after applying a 20% conglomerate discount.
DRVN (Driven Brands): Moving DRVN to Best Idea List from Long Bias list. Several main drivers for our positioning. 1) We like this model, a lot, and have gained conviction long-side after doing the deep dive research on each of the underlying businesses driving this model. We think that the top line and EBITDA targets set out by management are an absolute slam dunk. While the bear-case is that this is an acquisition/roll up in the auto services industry, we think that the organic growth will surprise on the upside. DRVN has one of the strongest unit growth stories we can find in retail. Currently DRVN operates 4,372 locations across America, Europe and Australia with 250 new openings already confirmed for 2022. DRVN also has commitments for 800 franchise agreements and 200 company-owned openings for visibility to 1,000 organic openings over the next 4 years. 2) The Car Parc continues to grow older as 2020 was an inflection year in the % of cars in the fleet older than 5 years given the delays in the auto supply chain and the corresponding moves in the Manheim Index. We see the % of the fleet older than 5 years continuing to grow over the next 3+ years, keeping in mind that the last upcycle for an increase in the age of the Car Parc lasted from 2003-2013. Driven Brands' sweet spot of vehicles that the portfolio services is cars greater than 6 years old. 3) Ultimately, in what we consider to be the ‘uncompable year’ for retail (over a record 2021 in revenue and profits) DRVN is one of the few companies that should drive both sales and margins higher. While it carries a hefty 18x EBITDA multiple, that’s down from 28x at the peak. Even if the multiple holds constant – which we think it will – we think that earnings and cash flow growth alone gets you a double here over a TAIL duration.
GRPN (Groupon) – New Long Idea. Adding GRPN Long Side. This stock resembles our call on GME in late 2020. A recognizable consumer brand, yet it's a company that has been left for dead due to the consensus secular view of the business being a melting ice cube. Valuation is near trough at 3.5x EBITDA, while short interest is relatively high at 13%, and we see some potential catalysts to accelerate the business in 2022. The core digital coupon business of GRPN has been under pressure over the last decade as the proliferation of retail ecommerce and apps has taken coupons more "DTC". However, we think the value proposition for the consumer and marketing opportunity for local businesses still makes a ton of sense. If GRPN was going to die, the pandemic should have been the straw that broke the camel's back. Instead, it appears GPRN has seen a bottoming in North American active customer count around 15mm at the same time the pandemic has hit the reset button on local businesses from both a supply and demand side. On the continued consumer 'reopening' and new business turnover, there will be new opportunities for marketing to new customers and Groupon is a powerful tool for that. The company also used the pandemic as an opportunity to change the business structure and reduced headcount to be less prone to demand volatility. Recent revenue trends are optically overly negative due to a change in structure of the company's Goods business from an owned to a 3p model, perhaps making for overly negative sentiment. The company has a new high quality CEO as of a month ago in Kedar Deshpande who spent 10 years at Zappos including being the CEO over the last year after the passing of Tony Hsieh. We suspect Deshpande makes this move knowing there is big potential with Groupon. Lastly, the company has an equity investment in SumUp, the European payments solution provider that is similar to Square. It disclosed a material gain in 4Q 2019 related to an observable price change in this investment. SumUp is a high growth payments company, and though we don’t know exactly its stake in SumUp GRPN's 10-Q suggests the equity stake in SumUp is in the area of 25% of the current EV of GRPN, which appears conservative. When we sum up (pun intended) these points, it checks a lot of boxes for a company about to unlock significant equity value. We've still got some incremental research to do, but if we're right on the business trajectory we think this is a 1 year double and potential 4 bagger over 3 years. The Macro Quad setup and near term Omicron risk are keeping us cautious on the timing of a high conviction call as well, but we could easily see this as a best idea within 3-6 months if we get conviction in the business acceleration.
CHANGES TO SHORTS
DKS (Dick’s Sporting Goods): Moving to Best Idea Short from Short Bias list. There are few categories that benefitted from the pandemic as much as sporting goods, with per capita spending in 2021 clocking in at $335 vs pre-pandemic levels of $235. With a massive spending and retail sales headwind coming in 2022, we think that the sporting goods category gives back some of its gains realized over the past two years. As it relates to DKS, the company’s earnings are clocking in at $15.50 for this FY, nearly 5x pre-pandemic levels. The Street is modeling a slight mean reversion to $12 in EPS power over a TAIL duration, but we see risk to the downside. The stock has stopped going up on good news (upwards earnings revisions), and is unlikely to perform well in Macro Quad4. We think earnings mean-revert to $8-9ps, or about a $75 stock vs the current $112.
DTC (Solo Brands): New Short Idea. Solo Brands originally started in 2011 as just Solo Stove, but in 2021 acquired Chubbies (apparel), Oru (kayaks), and Isle (paddleboards) to create a portfolio of brands – that ultimately have Zero synergies at the company or consumer-level. The company went public the traditional route back in October at an initial price of $17/share, and has been broken ever since (currently trades at $16). The outdoor categories it serves benefitted materially from the pandemic, and all of them are likely to slow materially over 2022 and 2023 – yet the consensus has earnings growing 20% over the next two years. We’ll take the under on that. If not for the pandemic, this company would never have come public. Real underlying earnings power is likely closer to $0.50 per share vs the Street at $1.20, and that’s worth maybe a 10-12x p/e. This stock should get cut in half from current levels.
BOOT (Boot Barn): Adding BOOT Short side. BOOT is an over-loved retail stock as one of the few unit growth stories in retail while delivering strong comp growth and profitability over the last few years. The sell side is near peak bullishness with 9 of 12 analysts having Buys and zero Sells. Short interest is at trough and it carries relatively high multiples for a specialty retailer at 20x PE and 13x EBITDA, though the historical growth certainly justifies that valuation. However, we think the forward earnings growth will not be supportive of the multiple over the coming year. Margins are at peak having seen gross margins gain nearly 550bps from 2019 levels, split roughly half between merch margin and occupancy leverage. We've been vocal about the margin reversion risk in apparel and footwear in 2022. Boots are half of sales, with apparel just over one third. Both likely have material pressure on merch margins going forward. Pre-pandemic BOOT was expanding its apparel offering into a new aesthetic called "Just Country" which was designed to be more widely accepted casual western apparel and more fashion oriented. This has been successful in driving the business, with recent outsized growth in ladies fashion, but it's also taken the business outside of the core into a more competitive apparel segment that we think will see rising levels of competitive/promotional intensity going forward. On the boots side, footwear demand has been more athletic than dress during the pandemic, so we think dress has better forward sales recovery opportunity. The Work/Western/Hiking boots of Boot Barn functionally probably fit somewhere between the two. Though, there is potential that BOOT has been benefitting from a recent "fad" shift to western apparel. It's probably not a coincidence that we have seen all time peaks in google interest for "Yellowstone" and "cowboy boots" both in Fall of 2021, as Yellowstone became one of the top rated TV shows of the year. Taking a step back, BOOT is now at 289 stores in the US. We follow the retail guideline that the first 250 stores in US retail is the 'easy growth' based on top markets and competitive/self overlap. BOOT crossed that threshold around the start of the pandemic. The company just highlighted an improved store unit return profile for those opened after March 2020, though we think the pandemic footwear/apparel demand and profitability trends explain that dynamic. On a forward basis we see margin and earnings revision in fiscal 2022 and ultimately new growth coming at lower profitability and lower returns than observed over the last 3-5 years. For 2022 we're looking at $4.25 to $4.75 in EPS with the street at $5.50. We think on the downward revisions the multiple tracks closer to mid teens for a stock around $70 or 35%+ downside risk. If you like pairs, we'd put this against CAL Long.
CROX (Crocs): New Short Idea. We give CROX management all the credit in the world, as the brand went through a genuine ‘rebirth’ leading up to and through the pandemic – for reasons having nothing to do with the pandemic. Yeah, the casualization of wardrobes likely helped CROX to an extent, but the brand unmistakably became more relevant over the course of the pandemic – with key influencers supporting outsized brand growth. But there are three things we don’s like – 1) growth in the core is unmistakably slowing – with a deceleration in wholesale, retail and DTC. Perhaps its just the law of large numbers, but a slowdown is a slowdown. 2) Margins are extremely peaky – sitting at ~29% vs low-teens pre-pandemic. The right margin level for this business is probably around 20%. 3) We absolulutely HATE the recent ‘Hey Dude’ acquisition. A huge deal for CROX at $2.5bn – it’d have been better served to buy AllBirds at that price. But the reality is that when hot fashion brands are at all time high margins, face a decelerating growth trajectory, and start to acquire much more complex businesses outside the core – its simply bad news. The stock doesn’t look expensive at 13x earnings, but in all likelihood, the real earnings power is about 2/3 of what we’re looking at today, which suggests around 30-40% downside in the stock from its current $123.
