RH Reporting 4Q in the heart of Deep Quad 4 on Tuesday. Anyone who listens to a word I say about the best names to own in retail over a TAIL duration knows that I think RH is perhaps the most compelling investment story in a generation. People think I’m nuts here, but I continue to think that RH pushes $2,000 over a 5-year time period vs just $350 today. People also thought I was nuts when I made the call that it was a 10-bagger at $30, and look how that turned out. It took a strong stomach for sure, and patience through severe near-term volatility, but the call worked once, and I think it will work again. That said, on Tuesday the company’s print should be a mixed bag. The earnings number itself should be solid – despite what the credit card data says (it suggests trends are lousy). It was wrong last quarter, and I think it will be wrong again. But the company’s guide is what scares me. Let’s respect history and be clear that the ultra high-end customer for RH is feeling ‘less rich’ after their portfolios got ‘Quad 4’d’ since the last earnings report. And lets also be students of history and respect what the company said back in 4Q18 after a precipitous draw down in the market and the impact of the negative wealth effect on short term demand. Check out Friedman’s quote from that now infamous conference call…
“well, one, we're as confident as we can be with our outlook. Look, we gave our last outlook in December 3 after market closed. And on December 4, as many of you now, we launched a convert. Our stock was, I think, trading after-hours in the 160s and closed that day at 140-something. And we started the conference call with the convertible debt. I think we had 40 people on the call. I gave a 20-minute presentation and asked for questions and it was crickets. And the bankers asked for questions and it was crickets. And we found out in the 20 minutes we were talking, the market dropped 400 points on its way to down 800 points and on its way to down 4,000 points in the month of December. And look, our business is tied to the high-end consumer. They're tied to the stock market. It shouldn't be any new news to anybody that, like, severe volatility in the stock market is going to sway a business like ours, especially a high-ticket business like ours that could be pretty discretionary. So for what we can control, we're super confident”…… “Do I feel bad that we took earnings guidance up on December 3? Not at all. Not at all. The next week, our business dropped 10 points and we have no control over that.”
Does the market expect a sequential slowdown? Absolutely…the stock is down 42% since the last print compared to just a 3% decline for the S&P. Let’s also respect that in the quarters following the company’s statement four years ago we saw an acceleration in demand as purchases were not eliminated during the equity market hit, they were simply delayed. That suggests that we’re going to see growth pushed into 2H – which is at the same time we see the effect of the company opening its European business (RH England, RH London, and RH Paris), as well as opening its Guest House initiative in the US, launching RH contemporary, and benefitting from a full reopen of its restaurant business post Covid. The growth drivers are almost too numerous to count. I’ve said it before and will say it again – if there’s one name to own over a TAIL duration in retail, it is RH. But we need to get through this Tuesday’s guide first. And as an aside, from a guidance perspective, this company wants to buy back stock – in size. It knows it serves itself no justice by putting up a bullish guide when the stock is washed out like it is today. It would rather bear-up the narrative and be on the other end buying stock. Bullish long term, but a risk we can’t ignore into Tuesday.
Lululemon (LULU) | We’re Bearish into the Print on Tuesday. 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.
Williams-Sonoma (WSM) | Coming Off Our Long Bias List. Nothing wrong with this company, and the stock is flat-out cheap at sub 10x earnings…but 90% of retailers could be considered ‘cheap’ right now as we’re in the depths of Macro Quad 4. I still think that the Street is underappreciating the sustainability of some of WSM’s recent gross margin gains, but make no mistake, as demand mean-reverts in the home category over a multi-year time period, WSM will start promoting/discounting product again. We’ve already started to see the promotional cadence pick up ever so slightly. This company is flush with cash and is buying back stock left and right. But I can see a situation in 2H – even after we’re out of Macro Quad4 – where sales are slowing (it doesn’t have asymmetric drivers like RH does), gross margins are down, SG&A costs are rising due to wage pressure, and the only thing driving earnings upside is stock repo. Not the type of name I want to be long.
Oxford Industries (OXM) | Moving Higher on Best Idea Short List. OXM Guidance Is Simply Not Believable. Short It. Best Idea Short Oxford Industries beat the quarter on a 2% sales beat – no surprise given the strength that we’ve seen from other retailers around the holiday quarter. But the big surprise is that the company guided up 1Q and 2002 massively. Guided to $8.75-$9.15 vs estimates of $7.80. The company noted that ‘the consumer is flush with cash, and they are planning units and AUR up meaningfully in 2022. Which should drive both top line and margins’ [we’re paraphrasing]. Quite frankly, we’re stunned to see such a bullish guide when we’re staring down the barrel of what’s likely to be the biggest sequential slowdown in discretionary consumer spending in a generation, with particular pressure in the apparel category. This company seemingly has no Macro process, historically has poor forecast accuracy, and at a minimum shouldn’t have guided so aggressively. The stock rallied on the guide, as it arguably should, but we’d fade this HARD. The real earnings number over the next 12-18 months is likely to come in closer to $6 per share vs the ~$9 guide. On such a big downward revision, we wouldn’t be surprised to see this trade at a mid-high single digit multiple, which suggests a stock of $40-$50 vs its current $92. Definitely very shortable here on last week’s bounce.
Hibbett Sports (HIBB) | Moving HIBB Down on our Short Bias List. It’s been a short for us since our Sporting Goods call in Feb 2021. On the bullish side for HIBB in 2022 Nike appears to be done cutting wholesale distribution for the foreseeable future, and HIBB made the cut on being an ongoing partner. That’s a big deal given Nike was 64% of sales last year per the 10-K filed on Friday. Being in bed with Nike is both a blessing and a curse. Your store remains relevant with the consumer, and generally has less markdown risk than with higher assortment of lesser brands, but Nike has a lot of control over your absolute margin level and your ultimate destiny. Nike is happy to have wholesale partners that appropriately represent the brand, but that generally means wholesale pricing and store investment where double digit margins are unsustainable. Also on the positive side for HIBB is the fact that Nike is coming out of some of the regional competitors that didn’t make it through varsity wholesale cuts. Perhaps there are some customers up for grabs. That’s about where the good news stops, the compares on sales and margins are very challenging. We think the street is too high on earnings, though with the stock trading at 4.5x EPS, the market clearly recognizes this. 1H will see a lot of sales pressure lapping 2 years of stimulus and share gains, though merch margins might hold up with supply still catching up. Longer term we expect HIBB to see operating margin reversion to around 7%. Earnings power around $6.75 to $7.25, so big earnings revisions vs the consensus $10.80. Yet, if $6.75 is the right EPS number, the stock is trading under 7x. Still negative catalysts around earnings to come, but less downside with the change in Nike risk.
Academy Sports and Outdoors (ASO) | Expect a Mixed Print on Tuesday. Like with HIBB, street looks high to us for 2022, and we do think there is risk of a guide down on 4Q earnings, though we again argue the market expects a downward revision at this price. We’re at $5.75, consensus at $6.30. So even though the stock is super cheap even on a guided down number, there could be some risk around the event. At this price we’d actually prefer to see the company guide down and set a beatable bar for 2022. He market will give consistent beats a bigger multiple later in the year than a guide up here in Quad4. We like ASO as our long in the sporting goods space for several reasons. It made the cut with Nike, and only has about mid-teens sales exposure, so there is lots of room for growth in the Nike relationship while still being at very healthy levels. ASO has quality regional exposure at it relates to net migration trends. With a cleaned up balance sheet the company can execute opportunistic cash return. The KKR overhang is gone with their position closed out last year. Finally, the company will soon be opening stores becoming a rare unit grower in retail. All of those factors we think means this deserves a multiple of at least 10x and more likely low teens. Downside support is strong, and upside in 2H when we get out of Quad 4 is fierce.
Warby Parker (WRBY) | Moving Higher on Short Bias List. Warby Parker’s stock finished this last week up 8% with no incremental news since its earnings report back on March 17th. Despite the one-week run of the stock, the fundamental thesis of this company has not changed. WRBY’s revenue is currently 60/40 retail and e-tail, which is good, but the company operates stores in expensive locations while providing a value proposition of a “value” price point product. That dichotomy is a structural pressure on margins especially for a company with goals of opening 30+ stores per year. Additionally, the company continues to spend on marketing and customer acquisition, which is what a good company does, but those costs will continue to grow as fast if not faster than revenue as WRBY targets 20%+ top line growth. Specifically, in FY2020 WRBY revenue grew 6% while advertising costs grew 35% and last year (FY2021) WRBY’s revenue grew 37% while advertising costs grew 50%. On top of that, with opening 30+ stores per year, there are system, labor, and store costs that need to be added to the model. The company outlined a 100-200bps improvement in EBITDA margin leading to profitability in FY2022 on its earnings call, but we continue to see headwinds on both Gross and SG&A Margins preventing a pathway to near term profitability.
Solo Brands (DTC) | Print On Tuesday – EPS Looks Good, But Beware of the Guide. Short. At its ICR presentation on January 10th DTC discussed that the company in 2021 did $400mm+ in revenue and $120mm+ in Adj. EBITDA implying a 30%+ Adj. EBITDA margin. Solo Brands’ quarter ends at the end of December, so those metrics gave a read to the Q4 business trends. Consensus has modeled both revenue and EBITDA right at those company disclosed metrics for the full year as well as the implied Q4. We are modeling revenue and EBITDA both slightly ahead of consensus for this upcoming quarter and think DTC beats EPS estimates because the range the company has upside (guided ‘$400+’ not $400mm) and it is a recent IPO that has been beat up and needs to earn credibility on beating numbers. However, the forward outlook with this company is more important, and since the company’s Q1 finishes at the end of March we anticipate the company to give guidance, or at least a read, that has a strong understanding of what results will look like for Q1. We have seen the guide downs from WEBR and COOK and anticipate DTC could espouse a similar view in its guidance given that Solo Stove contributes nearly 75% of the company’s revenue. Beyond Q1 the company still plays in the two most at-risk categories of consumer in durables and apparel, and we anticipate both revenue and earnings below where consensus currently stands for FY2022. The stock is heavily shorted, and sitting on new lows over 60% below its November highs, there could be a rally on better than feared type guide. But will be tough to find real buyers here with the lockup still to come in late April.
