H&M Hennes & Mauritz (HM.B-SE, HNNMY) | Going short H&M. 60% Downside. Outstanding long-term short in apparel. H&M was once the dominant model in apparel for disintermediating the traditional fashion retailers with inexpensive fast-turning sales of trend-right apparel. While it grew up over the past decade, the company got way too big to remain at the top of the fast-fashion food chain, amassing a fleet of ~4,800 stores globally – a number that’s both staggering and unsustainable. Aside from the traditional retailers ‘catching up’ and getting faster and more relevant to the end customer, the explosive growth of SHEIN poses the biggest existential threat that H&M has seen since Primark – but much worse given SHEIN’s online-only model (Primark is store-only and hurts the most in Europe). The consensus has sales climbing over a TREND and TAIL duration, with margins going up from 2021 levels despite what should be a major negative inflection in margins as apparel inflation spreads go negative in 2H as inventories build in the channel in the face of inflating product costs. Over a TAIL duration, the Street has EPS going from SK6.53 in ’21 to SK9.63 by FY24. That couldn’t be more wrong. The store count is shrinking – which alone should put this name in valuation purgatory – online sales are slowing, gross margins should be under pressure primarily due to the growth of SHEIN – which undercuts H&M price points by more than 50% on like for like items. Ultimately, we’re coming in at TAIL earnings of between SK4.00-5.00 per share. We think that historical average valuations are absolutely meaningless, as this used to be a growth company, and now is turning into the opposite. Today we’re looking at 16.5x earnings on the Street’s numbers, and we think that the Street is too high. It’s actually trading at closer to 30x our TAIL earnings estimate – which is egregiously too high. This name is levered and if our model is right over a tail duration, it will need to tap capital markets and likely cut its dividend. In the end, we’re likely looking at 10-12x our estimate (or about 4-5x EBITDA), which is about a SK50 stock – or ~60% downside from current levels. This is one of the few apparel names out there with big earnings downside where you also get paid on the multiple. Solid long-term short and a definite Best Idea Short candidate as we get deeper in our research.
RH (RH) | Moving a notch higher on Best Idea Long list – now #2 behind CPRI. Gotta say, it was tough to move RH above CHWY with the latter trading with a $2-handle. We think we’re months away from a big inflection in business momentum and sentiment at CHWY, and still think that name is $150 over a TAIL duration. Also a toss up between RH as #1 on our list vs CPRI. RH has better long-term upside (and no risk to shutdowns in China) but we still think that CPRI has the best near-term earnings juice, as well as meaningful margin upside. As for RH, the reality is that RH threw us a bone last week by levering up in order to buy back a material part of the float, which lends massive downside support to the stock at $336. By our math, after backing out shares owned by insiders and holders (like Berkshire) that will not sell, as well as shares that are short the stock, the company can repo well over 50% of the adjusted float at current levels. We’ve gotten a lot of pushback on this name over the past week from institutions that think that RH will take a ‘slow and steady’ approach and will wait to repo stock until demand normalizes. But that’s not how RH rolls. ‘Demand normalization’ will likely push this stock back up above $500 and management knows that. We think that the company lowered the bar as it relates to top and bottom line expectations in a way that de-risked a near-term earnings miss, and we’re coming in 50% ahead of the consensus over a TAIL duration – almost all of which is top line driven, though aided by material repo. We’ve been wrong on our RH long during this deep Quad 4. To be clear I (McGough) hate being wrong more than I like being right. But this feels like when we were wrong on RH from $90 to $30 in 2016. All the while, our call was for a $300 stock. Ultimately we were right. And as we outlined in our “Roadmap to $2,000” BlackBook (Replay Video Link: CLICK HERE), we think that the TAIL upside in this name is absolutely fierce. Even the bulls out there aren’t bullish enough – not by a long shot. This is a core long-term retail holding, and the risk-reward makes all the sense in the world to us today.
MarineMax (HZO) | Upping to Best Idea Short List. The company came in better last week on the print than we expected, but with a $0.60 EPS beat and only a $0.30 per share guide higher, we think we’re one step closer to a crack in demand, excess yacht inventories, and a severe hit to gross margins. We’ve seen this story play out before, and it does not end well. This time is likely to be no different. We’ve started to see cracks in spending and sentiment at the high-end, and MarineMax is the ultimate play on ‘shorting the rich’. MarineMax is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. In terms of the business mix new boat sales constitute 70% of sales and Used Boat Sales another 10-15% while the remaining 15-20% is split up between Maintenance, Repair, Storage, Equipment/Accessories, F&I, Brokerage Sales and a Charter Service. Since 2013 HZO has had gross margin clock in between 24% and 26% every single year and operating margins in the 4%-8% range, however in the environment of low inventory and a consumer flush with cash, Gross Margin in FY2021 (company's FY ends in September) stepped up to a new high of 32% while operating margin similarly rose to 11.4% resulting in earnings per share of $6.78 for a company that earned $1.63 in the year pre-covid. That increase is predominantly driven by unsustainable pricing and mix in a low inventory environment similar to how new car ASPs and margins are at all-time-highs for the auto dealers. The pricing and mix is heavily weighted to the higher end/luxury consumer buying the mega-yachts such as Azimut rather than the average consumer buying a Boston Whaler or a new Mastercraft wakeboarding boat (see chart below). Yet, consensus has straightlined the new peak 32% margin into perpetuity and is modeling that $7-8 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision.
Source: BoatsGroup 2021 Market Index Report
Etsy (ETSY) | Earnings Wednesday. ETSY sits at the top of our Best Ideas Short list. The call has been working well since we went short in September and reiterated the position on stock rallies after the last two earnings releases. Expectations are probably as low as they have been into a print since we have been on this call. There is clear weakness in ecommerce over the last couple months with slowing trends in Census non-store retail data and weak revenue results and forward outlooks from OSTK and AMZN last week. Add on for ETSY the buyer and seller strike around the company’s plan to increase its transaction fee in the face of sellers already seeing slowing demand and cost pressures rising. We think the sellers have a real point here, ETSY has communicated that the increase is to enable reinvestment in marketing and seller service improvements, yet you’d think the company could tap into ~600bps of margins expansion it’s seen vs pre-pandemic before apply pressure to its sellers. Or have deployed the capital it spent on two pricing acquisitions in 2021 into investment into the core platform. We think ETSY has a growth problem in 2022 driven by churn on outsized pandemic customer growth and wallet share reversion away from the online channel of ETSY categories. Home is the top category for ETSY, and OSTK’s revenue miss suggests that category online is under pressure in early 2022. 2022 Consensus Revenue and EBITDA expectations remain too high. Valuation is now to a reasonable level relative to historical trend, though many online peers are making new lows on multiples. The stock broke through our original $100 level of downside, though valuation is not a catalyst, and if revenue and EBITDA numbers are being revised lower with customers being rapidly churned off, the market may very well start to think of pre-covid EV (plus some acquisition value) as the floor. The more important data point is likely when will the business inflect back to accelerating organic growth, and while ecommerce generally is likely to see an inflection in 2Q22, ETSY’s churn risk suggests its inflection might be another 3 or 4 quarters away. We’re inline with consensus on revenue for 1Q, slightly below on EBITDA, but we think expectations for the rest of the year still need to be revised much lower.
