Gamestop (GME) | Finally booking the win on GME. Removing from Long list at $165 (we went long in Dec 2020 at $15). On our January Black Book we analyzed the various business transformation opportunities. There we felt a fair price range for GME handicapping a wide dispersion of outcomes would be $75 to $125. The stock closed Friday at $165 after a rally post 4Q on an insider buy by Ryan Cohen and basically zero fundamental change. The company has reset margin expectations significantly lower, indicating it is happy to lose money to gain share. That means it could be a long time to before we have real earnings generation and therefore little to no valuation support. The best bull catalyst opportunity would be the launch of the NFT marketplace expected this quarter, but at this price there is a lot of good news around that event already priced in. With Quad4 here and a few months at least of consumer pressure ahead, there is a real chance of revenue slowdowns with GME facing tough growth compares. With a management steering the focus on revenue growth, any growth weakness will be bearish for the stock. As much as we see interesting long term business model transformation potential, this isn’t a time/price to be bullish. We’ll revisit this one later in 2022 after we learn more about the company’s NFT gaming marketplace and other aspects of the new leadership team’s turnaround strategy. For now we’ll book the gain.
Guess? (GES) | Upping to Best Idea Long. While we have been vocal about the apparel space on slowing revenue and margin reversion risk due to normalization of markdown rates and inventory bloating, GES is an exception to that trend. In fact, we’re getting to $3.85 in EPS for this year vs the guide (and the Street) at $3.15. We think that the revenue guide set by the company is too low and will be raised throughout the year, and that the company side-steps the Gross Margin risks that we see broadly for the apparel space. The company has reduced its overall SKU count by 40%, raised AURs in Europe and North America by 15%, and created one global Guess? product line to improve the brand. Reducing SKU count helps eliminate markdown risk through not producing low velocity goods that would need to be cleared out. While AUR growth could shrink, the brand will still see AURs above 2019 levels driven by the outsized gains. The global line helps create pricing power and high brand recognition globally. Lastly, this ASR program is important. The company announced it will buy back $175mm worth of shares in an ASR program which equates to about 9mm shares at the current share price. Breaking down the float of 65mm shares, the Marciano Brothers and CEO Carlos Alberini own 26mm shares and ETFs own 11mm shares (insiders and ETFs own 57% of the float). So in the ASR the company is buying back about 1/3 of the tradeable shares. The CEO has a big payout target that triggers as early as mid-year if this is a $35 stock, and if we give this name even a 10x multiple on our estimate for this year, we think he gets paid. That’s good for a mid-high $30s stock over a year vs $22 today.
Caleres (CAL) | Upping to Best Idea Long. We reluctantly took this off of our Best Idea Long list when Nike came out and cut its Foot Locker allocations by 1,000bp – as we viewed that as a sign that ‘nobody is safe’ who does business with Nike. To us, that suggested a permanent multiple haircut. But on Nike’s conference call two weeks ago it made it 100% clear that it was done cutting wholesale accounts, and would actually start to grow the accounts that ‘made the cut’. This is a game-changer for CAL. Famous Footwear, which accounts for about 60% of CAL EBIT (about a third of which is Nike) is a major beneficiary here, as one of Nike’s go-to retailers in the family footwear channel. Nike is going to be allocating capital to grow in these remaining wholesale accounts, and will expect the retail partner to do the same – so margins might be lower pre-pandemic, but we think the growth profile is better. CAL should have absolutely ripped after the conference call, but thanks to Macro Quad 4, the stock is flat since the announcement. We think that CAL’s dress shoe business should see a meaningful rebound this year, and that the company should put up $4.60 this year vs the Street at $3.90. Then next year, we’re looking at earnings of $5.25 – a full buck ahead of the Street. That pegs the stock today at 4-5x EPS, with earnings catalysts along the way. If we had to pick one name that will be taken private over the next 12-months in all of retail, it’d be CAL with the stock in the $20s. Once we’re out of Quad 4 and the Street sees the earnings power that we do, it should trade closer to 8-10x EPS, or $40-$50 vs its current $21.
Allbirds (BIRD) | Upping on Long Bias List. This is a former Best Idea that we jumped off of about 25% higher when the top line clocked in at what we considered to be an anemic level of top line growth. But we think that Nike cutting FL by so much opens the door for brands like Allbirds to gain shelf space on the wall. The BIRD product offering is ideal to the FL customer (unlike HOKA, which is more suited to a performance customer at DKS). Even gaining 3-5 slots on the wall at FL’s ~3,500 doors would be a massive ramp in top line for the company, and would help it gain relevance with its core consumer, and subsequently slingshot into better growth in its own DTC model. We’re not ready to make BIRD a Best Idea Long again yet (maybe we would if we weren’t in Quad 4), but we definitely like it better with the stock dogging it at $6 and under a billion in market cap.
Boot Barn (BOOT) | Punting this Short Idea. Do we think that BOOT is over-earning? Yes. But it might take a while for that to manifest itself in the Street’s numbers. The reality is that the Western-themed fashion trend remains white hot, and the next earnings revision is likely to be up – not down – making it one of the few apparel retailers that won’t be facing downward revisions this year. Given that there’s still a unit growth story here, the name is likely to carry its mid-high-teens multiple on $6.50(ish) in earnings – suggesting a stock of $120 isn’t unrealistic. Once the Western look loses steam, this stock isn’t just going to roll, it’s gonna crash – hard. But it’s simply too soon to make that call.
PVH Corp (PVH) | Removing from Long Bias List. This stock is dirt cheap. But as I (McGough) have said many times – when I lead in with valuation as the first point – it’s probably a weak call. We could argue that there’s defendable downside support with this name trading at 6-7x EBITDA, but the reality is that the part of the business that is performing the best is Europe – not a consumer we want to be making a big bullish call on now. The business in the US is 30-40% dependent on tourism – and while we think it will recover we’d rather play DUFRY long side in that regard. And the company just dropped a bombshell on its call last week saying that the tax rate is headed permanently higher by 1,000bp due to the ending of certain tax treatments on Calvin Klein, an expiration of an agreement in the Netherlands, and geographic mix which translates to a $1.55 per share headwind. The fact that this was not communicated earlier is a big ding to management’s cred (notable, given our view that PVH has one of the best CEOs in retail), and the multiple. Given the headwinds we see in the apparel category in aggregate, we think there are better names to be long – most notably, GES and TJX.
