Capri (CPRI) | Moving CPRI to the top of our Best Ideas Long list. The stock traded off 21% last week, on close to zero change in fundamentals, materially underperforming peers with similar global exposure. It’s clear that a recession in Quad 4 with Europe slowing would materially impact numbers, but worst case we think that caps upside to numbers, rather than putting in play a miss. The stock is trading at just 7x next year’s EPS, and under 5x TAIL earnings. Could Quad 4 push this name into the $40s? There’s no reason why it can’t. But we’re looking at perhaps $5 downside near-term and more than a triple upside over a TAIL duration. We like the earnings catalyst calendar, and think that the company is heavily buying its stock back at current prices with $800mm left on its current authorization. For our full thesis on CPRI, see the Black Book we presented two weeks ago. Replay Video Link: Click Here
Decker’s Outdoor (DECK) | Moving meaningfully higher up our Best Idea Long list. Same story here…as we get deeper in the research, we get more confident in the model – both near-term and LT. The story here is actually similar to CPRI (though we like the earnings juice at CPRI better), in that there’s a sustainably more profitable core asset (Ugg) that’s funding outsized growth in a faster-growing, higher-multiple business – which is HOKA. We’re presenting our bull case on the name this Thursday March 10th at 12:30. This stock is trading like a broken growth story – meanwhile we think both top and bottom line will surprise to the upside over TREND and TAIL durations. We liked the stock a lot at $300, and love it at $245.
TJX, Inc (TJX) | Adding To Best Idea Long list. If there’s one thing that’s clear, it’s that inventories are building at an unhealthy rate across much of softlines retail. That’s an environment where off-price retailers flourish, and TJX is the best-positioned name in the group. Will ROST and BURL benefit as well? Yes, we’re modeling that they do, but transitions in the business climate like we’re seeing today don’t result in a linear hand-off to the winners. It’s choppy, and the best and most experienced players come out ahead. It’s all about talent and execution right now. There’s nobody we trust to execute better than TJX. We’re not calling for a double or triple here like with DECK and CPRI, respectively, but view this as a safer play where you still have 3 to 1 upside/downside. And the company just re-set earnings on the call last week to a level that we think is beatable. We build to $4.00 per share in earnings next year (vs the Street at $3.65) which we think is good for a $100 stock, or ~60% upside from here.
Revolve (RVLV) | Moving Higher on Best Idea Short list. This one has been a winner for us short-side, but it’s far from over. RVLV just crushed numbers and put up massive line growth and the stock STILL traded down. The problem is the guide... It just put up ~70% top line growth on the quarter, said that 1Q started off at a similar rate, and then proceeded to guide FY2022 growth to a sub-par 20%, which means that you just saw the best that RVLV has to offer, and it’s decelerating from here. And let’s not overlook that GM was down on 70% sales growth…likely due to freight and a higher than expected return rate. But being unable to leverage fixed GM components on such a powerful top line is far from impressive. So you’ve got decelerating growth and inventories outgrowing sales in a Quad 4 environment for a name that traded at 1-2x sales pre covid. It currently trades at 2.8x sales – 30-40% downside on this one on valuation alone. We just saw the peak…enjoy it while it lasts.
Lululemon (LULU) | Adding to Short Bias list. Yeah, I get it. Lululemon is a great brand, and it’s a very good (not great) company. But great brands doesn’t always make great stocks. We’ve been asked about this one a lot recently, and will give the same answer here that we gave to clients live – if we had to pick a direction here, it’s lower. We’re seeing the competitive set here get stronger – from traditional players like Nike, Adidas, Puma, Athleta and even UnderArmour. But are also seeing threats from new competition like Vuori. At the same time, we’re seeing incremental growth out of LULU come from a) connected fitness (Mirror), which we this was a mistake for LULU the same way it was a mistake for UnderArmour, and from b) Footwear, which is a new growth initiative this year which carries meaningfully more complexity to the business model at a lower margin. Could it ultimately be a good move for LULU? Sure…in like 5-years at best. But until then, we think the stock is priced for an acceleration in sales and margins, while we’re modeling the opposite. Only 2% of the float is short, and it carries a hefty 35x pe multiple, which could easily see 25x on slowing growth in Macro Quad 4. Definitely not a Best Idea short here, but starting with a $3-handle, we like it short side.
Macy’s (M) | Upping to Best Idea Short List. Macy’s is one of the companies that is setting unrealistic expectations with investors that the lack of promotions we’re seeing in the business is the ‘new normal’. Per the company -- “We believe that there is a more permanent shift away from deep, broad-based promotions to much more personalized promotions.” We don’t buy it for a minute. We’re seeing the supply/demand in unit economics for apparel sharply reverse in 2022 – with inventory already accelerating, and per capita unit consumption slowing, on what we expect to be lower prices per garment as the year progresses. Macy’s is in the crosshairs of this trend. Like JWN (also a Best Idea Short) we think margins will take a meaningful hit in FY23 (Jan) and that credit income (which is ~60% of EBIT) begins to roll over. This is a business that has TAIL earnings power of sub-$2 per share (vs consensus at over $4), which probably deserves a 3-5x multiple, or a stock closer to $10 vs its current $25. The company has already proven that spinning out real estate value into a REIT, doing sale/leasebacks, or spinning out the e-comm business are all not plausible. There’s little that an activist (or a better management team) can do to help this company.
Ralph Lauren (RL) | Moving Higher on Short Bias list. This name is likely headed to Best Idea status after we get past the March quarter, which we think comes in at $0.62 vs the Street at $0.37. Yes – a big beat – but that’s where the upside ends for RL. The brand is only performing now because the environment has been so astounding for everyone in apparel. Rising tide has lifted earnings power across the board – including at RL. We think the real earnings power over a TAIL duration is closer to $8-$9 per share, vs the Street at $11-$12. This is a dying brand with no exit strategy. No strategic buyer in sight (note LVMH talks – which we think were quick and decisively against buying RL), and no private equity firm would touch this name today with Mr. Lauren at the age of 82 and so heavily involved in the R&D and strategic direction of the product and the brand. What are they going to do…IPO it in another five years when he’s (hopefully) in his late 80s? In other words, we think that this name has one of the lowest risks of a takeout of any apparel retailer. Likely worth a high-single digit multiple on TAIL earnings, suggests a stock closer to $70 vs its current $116. Again, let’s de-risk the upside in the current quarter and get heavier then…though the guide is unlikely to impress.
