Moving ETSY from Top Slot on Best Idea Short List to the Short Bench. The call has worked very well since we added ETSY as a Best Idea short in September around $220. We reiterated the thesis in December and March with ticker in the top two slots on our short list. With the stock going from $298 to $86 since November, the market is clearly waking up to our call. Sell side target is down to $155 (still probably high) from $260. The company has churned off 52.5mm customers over the last 4 quarters, or roughly 60% of the customer base of 12 months ago. It’s down to a trough 16x EBITDA multiple -- nearly inline with the March 2020 lows, and 2022 and 2023 EBITDA estimates are down 11% and 13%. With the transaction fee increase, and improvement in top line and gross profit metrics is likely to come, that’s not quality growth, but could be a trough in rate of change nonetheless. This stays on the short side of our ledger as we still see some downside to revenue and profit numbers (though perhaps more EBITDA beats on lower marketing) and risk around churn given the company continues to add new customers in recent quarters, and re-engage previously lost ones, while churn has been exceeding our expectations. Not to mention we remain in Macro Deep Quad4 where multiples in ecomm/growth consumer names can easily set all time lows. There is a time and price we might want to own ETSY, but that’s not today. Here is our note following last week's earnings print: ETSY | Thesis Validator
OSTK Moving Higher on Long Bias List ahead of Pelion Medici Day May 10th. This could be a catalyst to get the market excited about the potential of OSTK’s block chain businesses. There hasn’t been much news since it was announced that ICE would be taking a stake in tZERO and an ICE executive would be stepping into the CEO role at tZERO. In our view there is no value being given to these assets in the current OSTK valuation. We’re not quite ready to make OSTK a Best Idea Long here in Quad4 with the online home category reverting, but we think this stock has significant upside potential over a TAIL Duration. We think that at today’s valuation, you’re largely paying for the Overstock retail operation, and are getting the block chain assets for free.
Pandora (PANDY ADR) | New Short Idea – Adding to Short Bias List while we dive deeper into the model and research call. You’d be hard-pressed to find any category of consumer expenditures that are over-spending relative to 2019 levels than jewelry. By our math, consumers are spending ~30% more on jewelry today than in 2019. We’re already short Signet (SIG) which is mid-price point jewelry tied to the dying US mall concepts like Jared and Kay. Pandora (based in Denmark) is a similar play, but more on a global scale (and with 2x the market cap). Like SIG, PANDY looks cheap-ish at 10x earnings and 6x EBITDA – but we’d note that the Street’s estimates over a TREND and TAIL duration look extremely bullish – as if the outsized consumption in jewelry we’ve seen over the past two years is sustainable in perpetuity. That’s just simply not realistic. This is a company where the core business – charms and charm bracelets – was down three years in a row before the pandemic, and the fad nature of the product has past its prime and the business subsequently lost nearly 1,000bp of margin (to about 25% -- still respectable, admittedly). And then the operating environment pulled a complete 180 over the past two years, and despite adding 15% in sales to the top line, it still had minimal flow through to margins. The consensus has sales over a TAIL duration growing in the mid-high single digits, while we think we’re likely to see a contraction of similar magnitude. That should cause the margin structure of this business to take another leg down, to margins in the mid-teens. Ultimately, the Street has EPS going from 41.7 kr in 2021 to 90-100 kr over a TAIL duration. We think we’re looking at flat earnings over that time period, setting the stage for a major downward earnings revision – or a series thereof – and subsequent de-rating. The cash flow here is a double edged sword, in that even with margins coming down and sales mean-reverting, the company generates substantial cash to repo stock (it’s less than 1x levered). But despite 40% of the float being repurchased over a TAIL duration, we still get to flat earnings. In other words, operating earnings are down by 40% and all you’re paying for is the company buying back stock as margins and financial returns erode. Per our process, this name is starting on our Short Bias list, and we’ll take it higher as we get deeper in the research call or if the price goes against us.
Vista Outdoor (VSTO) | Moving Higher on Short Bias List on News of Business Separation. We think this name has downside to $20-$25 (from $39) 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. On the latest print, VSTO announced that it is looking to split up its two primary businesses – something we think is happening at precisely the wrong time – with earnings on both pieces at peak. Optically, it looks attractive, but be careful what you ask for – both pieces of the business are over-earning and give a false read as to what the businesses are worth. 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. And very notable that if demand ebbs ahead of the planned separation in CY23, it jeopardizes the deal, which would be horrible for the stock.
