Vista Outdoor (VSTO) | New Short Idea. We think this name has downside to $20 (from $36) over a TAIL duration as we see normalization/mean reversion in demand for guns and ammo after peak consumption over the past two years. Vista Outdoor is a portfolio of nearly 30 brands spanning all aspects of outdoor activity. Nearly 60% of VSTO’s revenue and ~80% of cash flow comes from ammunition (Sporting Products Segment) through brands like Federal, Remington and CCI. Given social unrest and political factors during Covid, we saw all time high handgun purchases, hunting licenses and subsequent ammo stockpiling which drove outsized margins at VSTO. Earnings at VSTO were sub $1.00 per share pre-covid, with peak earnings at $2.50. This year, the company is on track to earn close to $8.00 per share, and the consensus is straight-lining $7.00 per share in perpetuity. We’re modeling a big 10% snap back in ammunition sales next year, which should cut margins in half to sub 10%. That gets us to about $3.10 in EPS power vs the Street close to $7.00. The company has been on an acquisition spree over the past two years, acquiring brands in golf, apparel, biking and outdoor cooking – and bought these brands when they were in a period of over-consumption as well. The stock looks extremely cheap right now, trading at just 5x earnings and EBITDA. While we could argue 3-4x cash flow on a 50% EBITDA miss, we think you get paid here alone on the earnings downside. Sentiment is actually quite bullish on the name, with all seven analysts covering it having a Buy rating with an average price target of $62 – and only 7% of the float is short. We think this is good for 40%+ downside – definitely a Best Idea candidate as we get deeper in the model and the research call.
Signet (SIG) | Taking SIG higher on Short list. The call has done reasonably well since we added it in January with the stock in the high 80s (stock now at $78). The company guided up the year on the 4Q print in March, mainly including the Diamonds Direct acquisition impact, which did not appear to be fully baked in on consensus models. The stock is “cheap”, with about $1.2bn in net cash and trading around 6.5x consensus earnings. But this is a company and a business that is built to be cheap as a huge mid-tier brick and mortar operator in the cyclical consumer business of jewelry. Trailing sales have been strong with re-opening demand and strong discretionary income levels for its core consumer, but the consumer environment we expect to see over the coming 12 months should mean significant earnings revision risk with street estimates too high. U of Michigan consumer sentiment is near all-time lows, consumer credit quality is just starting to come off the all-time highs, and yet jewelry consumption remains about 70% ahead of 2019 levels. That is simply unsustainable and we expect there will be an aggressive reversion coming for SIG. Will margins go back to the weak sub 5% levels seen in 2019? Perhaps not, but earnings will be heading much lower. TAIL earnings power here is likely in the $7 to $8 range while consensus is in the low teens. On the coming multi-year downward revision cycle we see downside to $50-$60 or 25%-35% downside.
Ollie’s Bargain Outlet (OLLI) | On Wednesday we added OLLI to our Best Ideas Long list. This is a beaten-up retail name that is likely to see a bullish inflection in the P&L next quarter. Rate of change in revenue and profits is likely to accelerate imminently. Contrary to most of retail, OLLI actually had a rough 2021 after a standout performance in the early days of the pandemic. We were correctly short it from August 2020 to August 2021 expecting a material revenue slowdown and margin pressure, which we got. Now it's facing easing compares while the underlying business trends are likely to improve. We expect a consumer slowdown near term, and that might sound like a bad thing, but for OLLI it means consumers become more cost conscious and go bargain hunting (at Ollie's) at the same time the other retailers will see inventory building creating good closeout buying opportunities for OLLI. Tack on a long-term store growth story with stores planned to grow low double digits for the next couple years. The punchline is a model that is churning out 45%+ earnings growth by 2H while much of the rest of retail will continue to see EPS pressure. With unit growth, low SD comps and gross margin reversion, the out years' EPS growth CAGR remains around 20%. OLLI is coming off trough valuation multiples. With the company returning to growth it should go back to reasonable historical multiple levels of 25x to 35x PE. For NTM earnings as of 2Q22 we're getting to $2.80, Tail earnings power of $3.50 to $4.00, and we think a rare unit growth story with this earning growth profile deserves a 25x to 30x PE. That gets to a fair value of the stock around $70 to $80 or ~50% upside from here. Historical a fantastic Quad 4 performer.
Lululemon (LULU) | Punting the Short. This name sat near the bottom of our Short Bias list, and now it’s off. While there’s a lot we don’t like about LULU here – most notably the growth in Footwear and Connected Fitness – the reality is that it might be another 1-2 years until these prove to be destructive to the P&L. In the interim, the company is taking up prices on key items in its core assortment. One of the few factors we favor right now for retailers and brands is the ability to take up price. We think this will be a focus on the company’s analyst day in NYC on Wednesday. We’re definitely not sold on the bull case – though will listen on Wed with open ears. We just think that LULU will be one of the few companies to drive margin upside this year due to pricing – and we think there are much better places to deploy capital short side.
Williams-Sonoma (WSM) | Added Short Side. In conjunction with our 2Q Themes deck last week, we added WSM short side. Not a Best Idea short, but more of a relative short to our RH Best Idea Long. Our housing team is quite bearish on housing for the next two quarters – and while we’d argue that its already in many of the Home-related stocks (like RH), we think that WSM will step-up promotional activity once the environment mean-reverts over the next several quarters vs a full price selling environment during the pandemic. The company is aggressively buying back stock, which should support earnings of $16 per share over the next two years – so the stock is hardly expensive at $149. But if RH trades down from here, names like WSM (as well as W and BBBY) should trade down more.
Gap (GPS) | Our Two Cents on the Activist Chatter. We have no skin in the game on GPS, but the stock traded up this past week on chatter about an activist sniffing around related to getting the company to spin off Athleta. It’s amazing to see activists around perma-broken concepts like Kohl’s that cannot be fixed, but no one has circled around Athleta and GPS. The reality is that Athleta is an exceptional brand, with runway to $2bn sales and 20% margins. That suggests $400mm in EBITDA. LULU trades at 25x EBITDA – so we’d argue at least a 15x multiple for Athleta – easy. That’s about a $6bn enterprise value, which is 100% of where GPS is trading today. That implies you’re getting Gap, Old Navy and Banana Republic for free. Yes, there are separation costs that would ding the value of the company, but are likely to be far less than when the company attempted to separate Old Navy in 2019. Again, we have no call on GPS right now, as the non-Athleta concepts fall in the crosshairs of the negative inflation spread thesis we outlined two weeks ago in our Apparel Deep Dive (Click Here), but we’re not negative on GPS as we are with most other apparel names due to the massive value within Athleta.
