DUFRY (DUFN-CH, DUFRY) | Moving five notches higher on Best Idea Long list ahead of May 19th interim sales results – now occupies the #4 slot behind CPRI, RH, and CHWY (moved ahead of NKE, PLBY, AMZN and DECK). As we outlined in our black book last week (Replay Video Link CLICK HERE), we think that business continues to sequentially improve – full stop – as virtually every Leisure-related travel metric we track is showing improvement – despite what mainstream media would like you to believe as it relates to weakness in travel due to covid. As travel rebounds, so will rents and SOME personnel expenses, but we think that this business is on track to nearly doubling margins as it emerges a different and more structurally sound, streamlined and dominant company post pandemic. Though the May 19th results will be primarily a sales update, we should expect to get clarity on the cost structure and cash flow as well. With the new CEO taking the helm in another two weeks we think we’re going to see an aggressive acceleration in the company’s push into food and beverage, which is could very possibly come via M&A. Keep in mind that Advent put him in the CEO role – and we think Advent is licking its chops to take DUFRY private with the stock trading at just CHf 36, and the ADR at $3.50. To be clear, at even a 100% premium from current levels we think that shareholders are much better served by this being a public entity over a TAIL duration. This ADR should be over $10 over 1-2 years, and over $20 over 3-5 years. Big idea with strong downside support. Better setup than much of the rest of retail in this deep Quad 4.
Allbirds (BIRD) | Moving higher yet again on Long Bias list. The stock had a rough week as international weakness (previously telegraphed by every other athletic brand out there) hit the overall top line, but the reality is that we were seriously impressed with the 35% top line growth in the US. And keep in mind that we have yet to see the positive growth impact of BIRD rolling out a wholesale model, which should be a meaningful growth accelerator over the next 12 months. The stock was off by 19% last week and now sits at just $4.25. No self-respecting institution will touch it here – which is what intrigues me about it. I think with the wholesale growth acceleration the stock doubles, and THEN it gets institutional attention and sponsorship. Keep in mind that this is a successful multi-platform brand that has broken through in a space with EXTREMELY high barriers to entry – and yet it sits at an enterprise value of just under $400mm. Strong downside support with meaningful upside if growth does what we think it will do.
RealReal (REAL) | Adding to Long Bias List. We’re big fans of the second hand market as one of the few areas offering up secular growth in apparel and accessories. REAL has the best authentication talent and infrastructure in the industry, and is increasingly automating the process through AI, which should allow it to scale and ultimately turn a profit – something that’s proved elusive since its inception. The stock went public pre-pandemic at $20, hit $30, and now sits at $3.75. Not a Best Idea for us yet – if anything we prefer ThredUp (TDUP) as it’s a more scalable model with a deeper competitive moat. But REAL is putting up good numbers, and we don’t see why a dying company like Macy’s or a player like eBay wouldn’t take it out to gain a foothold in the high-end resale business – which REAL dominates. For now it’s a call option – but a cheap one at that.
The Container Store (TCS) | Best Idea Long – Bullish into the print on Tuesday. We added this to our Best Ideas Long list last quarter after the hate-selling on gross margin pressure from materials inflation. For the quarter to be reported, reads in home lately have been mixed. Some companies have been highlighting no material demand change like WSM and ARHS, others, particularly in online home (like OSTK and W), have seen clear drops in demand. For TCS the reopening effect post Omicron is likely a tailwind to store traffic, especially in the spring cleaning season. We’d also note that google interest over the last few months has been up, perhaps aided by the release of the new season of The Home Edit, where TV organizers use and highlight a significant amount of The Container Store product. We think the organization category holds up well post pandemic being a more home maintenance vs home decorating/durables related with legs to be a long-term consumer trend. TCS is a clear leader in the industry. A few quick reminders on the TCS Long:
- The bear case is that this model will be disintermediated by online, yet you can clearly see the stability of comps and margins pre-pandemic despite online pressure across most of retail.
- This is also a very challenging category to shop online. The core customer is organizing a part of her home: closet, cabinets, mud room, garage, etc. There is no ‘one size fits all’ online solution. It takes hours to find the right product solutions online. Those are hours better spent in store with help from a TCS salesperson. Much of the revenue is in custom closets, which cannot be done online.
- Professionals like interior designers or professional organizers find the needed solutions (with employee expertise/support) for their customers at TCS.
- We see home organization as a long-term trend, and home investment/spend is taking a permanent lift in wallet share as a result of the pandemic behavioral patterns.
- Store growth was stalled after a broken IPO in 2013/14. TCS is months away from being a unit grower again. This retailer doesn’t have a store in the entire state of Connecticut. The company is guiding to adding 100 stores over the coming years in a mix of small and traditional formats. That’s more than double the current 94 base.
- The new CEO has been in place making changes for a year. The store messaging is being repositioned from “sale” to “experience” with visuals of organizational solutions. Systems have been put in place for better tracking of customer experience. The operations are being improved ahead of the unit growth catalyst.
We think this model will build to $2+ in EPS power over a TAIL duration, and deserves a low to mid-teens multiple, suggesting a stock upwards of $25 to $30 compared to $7.40 today.
Kohl’s (KSS) | Taking off Best Idea Short list, moving to bench. Approaching reasonable value. This stock has taken a beating – down 26% in the past month as the activist case to change up the Board and get the company sold has just imploded. With the stock at $65, and the lead activist working its book in the mainstream media that there were buyers ‘lined up’ at $70, we said that a deal was unlikely, and that this stock would likely revert back to around $45. The interesting thing is that KSS hired Goldman to facilitate a sale vetting process, but as the crowd of potential bidders is getting the sneak peak into the books, we think they’re seeing what we see – that the REAL underlying earnings power here is closer to $4-$4.50 as opposed to the guide and consensus of ~$7.50. With the stock at $48, we think that the risk/reward is much more balanced. We still think it’s worth maybe 6-8x $4.25 – or about a $30 stock. But we need to weigh that against the potential for someone like Hudson Bay or Simon actually making the ridiculous move to buy this asset. To be clear, we think a private equity buyer is massively unlikely.
UnderArmour (UAA) | Punting this dog from our Long bias list. I (McGough) learned a lesson with this one. I’ve consistently taken UAA down several notches towards the bottom of my Long Bias list and have been openly critical of the company’s capital deployment and growth strategy – which based on every bit of research we’ve done – has been sub-par (and that’s being generous). The lesson here for me is that when I begin to lose conviction and question a research call – either positive or negative – I need to be faster in going the other way. When I noticed the parallels between UAA and Reebok (a perennial share donor) I should have gone outright short UAA. But I had earnings estimates ahead of consensus – largely from lower SG&A spending and lack of brand investment (another massive pet peeve of mine – again – a red flag I wrongly looked through). In the end, I hate being wrong more than I like being right. And even though this in no way shape or form a Best Idea – and had no shot of being so -- I was wrong to stick with UnderArmour as a long. Even after doing this job for 28 years, we can still learn everyday. I know I do. This was a painful learning for me – but one that will help me generate more alpha in the future.
Williams-Sonoma (WSM) Taking higher on Short Bias list. The reality is the company is starting to promote heavier in its email campaigns – its as clear as day in my email in-box. Mark my words, when demand slows, this company (unlike RH) will step up the promotional cadence. It’s what it does. Also keep in mind that it was one of the first companies out with earnings and was overly bullish on both top line and gross margins – and that was BEFORE we saw the big negative comp pressure against last year’s stimulus and transfer payments. The company’s next update is unlikely to be so bullish on either metric. Is this a massive short here? No…but perhaps the only thing preventing a 20-30% selloff from here is the company buying back stock – simply because it has the cash. Like DDS, it’s buying stock at the wrong price and wrong time. Great hedge here against Best Idea Long RH.
Pandora (PANDY) | Taking higher on Short Bias list. We just added this short last week, and already got some confirmation this week from Brilliant Earth (BRLT) that demand for jewelry is slowing. This is a category that is overconsuming by 30-40% relative to 2019, and while names like PANDY and SIG look cheap, the reality is that consensus earnings expectations are too high. Pandora (based in Denmark) 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. Definitely a Best Idea Short candidate here – at least that’s where it's pointing as we get deeper in the research.
