RH (RH) | Taking a notch higher on our Best Idea Long list. With Gary Friedman taking out the options-related stock sale overhang away from the story in lightning speed (selling the IPO-related 1.75mm shares over just 3 trading days) the company can finally enter the market and put its balance sheet to work in buying back stock, which is a major source of downside support. Despite the company’s ‘gloom and doom’ exhibited on the last conference call, we’re modeling that revenue growth for the year comes in roughly 2x ahead of the guide, and that sheer unadulterated top-line growth at a sustained 25%+ margin is the main source of earnings upside over a TAIL duration. We think that once the company establishes ‘proof of concept’ in Europe, which is very likely to happen this year at the same time it’s beating numbers and buying back its stock, then this name gets re-rated as a global luxury growth story. It arguably also puts the company in play by either a strategic buyer like LVMH, or even a major shareholder like Berkshire. To be clear, we ABSOLUTELY do not want a deal like that to happen. It would be struck at what…$600-$700? That a double from here <…golf clap>. But that would rob shareholders from the TAIL upside that we see in this name to well over $1,000 over 1-3 years, and $2,000+ 5-years out. We get it that going long the rich in a deep Quad 4 environment is a risky proposition, but we think expectations have been re-set, sentiment is horrible, and the back half and long-term setup is quite bullish.
PLBY Group (PLBY) | Taking a notch higher on Best Idea Long List. Moving this name ahead of AMZN on our BI Long list. I get it…Quad 4 hates PLBY, and so does the investment community at large. But by our math, at $11.66, the market is placing a sub-$200mm value on the core Playboy brand, or 0.1x end retail sales for the brand globally. That also values CENTERFOLD at ZERO, despite our view that it alone will be worth nearly ~$60 per share over a ‘SUPER TAIL’ duration using conservative growth estimates. Could this stock crack the magic SPAC $10 threshold in a deep Quad 4? There’s no reason why it can’t. But our valuation work of the individual pieces suggests a value over 10x where the name is today, and 20x over 5+ years -- the upside/downside here over a TAIL duration is so material that we think it’s going to increasingly be tough for investors to ignore at current levels. We think business is trending well, management is executing on growth initiatives (lack of focus is investors’ biggest pushback) and there are material catalysts in 2H as it relates to us seeing real underlying cash flow acceleration (rare for a SPAC), and monetization of CENTERFOLD on the P&L. This name is not for everyone due to the volatility inherent to the stock – but it should be for those who like making money.
Taking RVLV and JWN Higher on Best Idea Short List. Apparel as a category is performing well ahead of the Easter holiday, as consumers re-buy spring apparel that they have not bought in 3 years. That’s created a positive backdrop around several apparel names – most notably JWN and RVLV. Both names should see material growth deceleration in 2H, along with the negative inflation spreads that we highlighted in our Apparel Deck last week (Click Here).
- Nordstrom (JWN). We have a VERY difficult time getting to the company’s $3.00-$3.50 guide for this year, and think that management is far too bullish in its assertion that it has pricing power this year – and in fact will see the opposite in 2H. We think next year we see earnings settle in around $2.00 per share vs the Street at $3.25. Note that of that $2.00, about $1.60 is credit card income. Basically, the model is evolving into the retail operations selling product at break-even to generate credit card income. But the way we see it, a zero-growth credit book deserves a mid-single digit multiple (note Synchrony trades at 6.5x earnings), which suggests a core value per share to JWN’s earnings stream of about $10-$11 – and then about 10x on the retail operation earnings – which gets us to another $4 per share in value. Add ‘em up and you get roughly 50% downside from current levels. There’s no real estate play here, no e-comm spin opportunity, with the only real risk being that the family takes the business private. But they tried once at ~$50, and then again at ~$30 and failed both times. If this is a $10-$15 stock we probably need to worry about that again – but not with the stock in the high $20s.
- Revolve (RVLV). Yeah, we know…the credit card data looks outstanding for RVLV right now…which is exactly why the stock has traded +32% since the start of March. All indications are that the company is putting up ~60% growth for the quarter, vs the Street at 40% and the guide of 20%. It’s a prime reopening beneficiary as people spend around holiday, refresh spring wardrobes, and attend events (like weddings which are at an all-time high). But we’re going to see a significant slowdown in growth in 2H, at the same time we think apparel Gross Margins go squarely negative. In its early days perhaps RVLV could have side-stepped the industry GM pressure, but the reality is that its turned into an online department store by way of going to wide and deep with its SKU assortment. Pre-pandemic, this name traded at 1-2x sales and carried short interest higher than 50%. Today it trades at over 3x sales and has trough short interest of 11%. That’s exactly when we want to be pressing a name like this. RVLV is one of the few apparel names that still carries a huge multiple on virtually any metric – 40x pe, 25x EBITDA, 3.1x revs, and 2.5% FCF yield. We think that within 12-months we see 50% multiple compression on lower revenue and profit expectations, which is good for a stock nearing $30 (currently at $53).
Gildan (GIL) | Shorting GIL. Adding to GIL to the short bias list. Gildan is not immune to the net inflation spread inflection that we expect to see across the apparel industry as highlighted last week on our Global Apparel Deep Dive. Costs are rising while retail channel pricing should slow and go negative. The focus for Gildan might be on the rising raw materials costs of cotton and polyester, up about 50% and 40% respectively. Higher costs from a year ago are just flowing through the P&L, so more of that to come. GIL has some operation and pricing levers to offset some materials volatility, though this is the biggest spike in a decade. Perhaps the other cost pressure concern to be aware of is what elevated oil could be doing to production costs globally in apparel manufacturing regions. GIL's manufacturing "city" in Honduras can handle this risk better than most with processes to reduce energy consumption and a supplemental power plant on site, but it is not immune to the directional cost pressure. With the energy/food price shocks, labor costs should see pressure, and you can tack on an elevated risk of political unrest that has occasionally disrupted GIL supply chains in the past. Cumulatively those cost pressures will put some material directional pressure on margins in the coming 3-4 quarters. The cost pressures come at the same time we are likely to see softening demand as we expect to see unit demand pressure globally, with the core GIL US market facing a consumer slowdown and GDP growth slowing pressuring corporate/promotional channel. If prices go up to offset costs, the unit pressure would be magnified. All in we see sales and margin pressure greater than what is in consensus expectations. That means EPS in 2022 closer to $2.40 vs consensus at $2.90. A troughy 12x PE on the downward earnings trajectory would put the stock around the high 20s or ~25% below current levels. Short interest sits sub 1%. We still like the long term growth story for GIL taking share in global basic apparel, particularly higher margin fashion basics, as well as the opportunity in US private label apparel. However, we think the trending model will including slowing revenue and greater than expected margin compression. We'd likely be interested long side around year end or early 2023 when we expect compares to look easier and the company will be approaching the growth catalyst of launching its Bangladesh manufacturing facility to drive further global top line growth.
