Canada Goose (GOOS) | ‘New’ Best Idea Short – Another 40-50% Downside. We’ve gotten 40% out of our GOOS short idea since adding it to our Short list in early February, but the reality is that the stock rallied last week on what we think was a low quality print, with overly bullish guidance. There’s a lot more downside to come here in both earnings and the multiple – about another 40%-50% by our math. Unlike most of apparel retail, GOOS still carries a multiple to it. 15x earnings might not seem heroic for what some consider to be a luxury brand, but we think that wholesalers are literally choking on GOOS inventory right now, the company itself is sitting on 485 days of product, and like we said in February, this will be the year where the brand cracks, and the company has to introduce a discounting model. Check out pseudo off-price sites like gilt.com, you’ll 63 different styles of Canada Goose product on sale, and it looks like it has ample inventory to back it up. The beat this past quarter came from the wholesale division, and our sense is that GOOS is selling wholesale direct to off-price retailers to unload inventory that otherwise will not sell. The consumer isn’t dumb – quite the opposite, actually. When trained that they can buy the product at a 35% discount in off price channels, they’ll be hard-pressed to go to a Canada Goose store or site and pay full price. We’re coming up with estimates (in US$) of just under $1 for THIS year, which is 30% shy of the Street at ~$1.30. We think that either the top line cracks in an effort to hold the margin, or that we see the inventory flow at lower GM in order to lighten up the balance sheet. Either way, the P&L cracks. And with it, comes the multiple. We see better brands (CPRI, for example) with more defendable downside, better margin potential and far more meaningful growth trading at 6x earnings. Why can’t GOOS trade at 10x on a miss in Macro Quad 4? No reason why it can’t. And this break will lead to a permanent multiple re-rating. That gets you to a $10-12 stock vs its current US$20.31.
Canadian Tire (CTC.A-CA) | New Short Idea. First Canada Goose, now Canadian Tire. No, I have nothing against Canadians. I just like finding good shorts, and Canada is being generous in that regard this week. If you’re not familiar with Canadian Tire – it operates several retail concepts that account for ~60% of EBIT – the biggest of those is Canadian Tire department store. It’s where the very loyal and sticky customer base goes to get their tires changed every fall and spring (snow tires required by law in winter in most provinces) as well as buy toasters, hockey stocks, fishing line, and wool sweaters. Customers love it – almost as much as Canadian money managers do. The other 40% of EBIT is split between a REIT, where the sole tenant is Canadian Tire. Think of it as a bond where the yield is totally dependent of Canadian Tire’s credit. And then the remaining 20% of EBIT comes from Credit, which is a sub-prime portfolio of credit extended to the marginal customer to buy items at the department store that they probably can’t otherwise afford. We don’t have a big problem with the REIT or the Credit business…it’s the retail arm that we think is problematic. In fact, the 60% of the business that is retail should be closer to 50%, but like we saw in department stores in the US, Canadians grossly over-consumed goods during the pandemic – but seemingly on a 6-month reopening lag. We have a 611 row model on Canadian Tire, and it's one single row that bugs me – row 49 – which is revenue per square foot at the Canadian Tire department store. Pre-pandemic it was C$336, with a cycle average sitting right at $300. Today it is at C$404, and the bulls will point to commodity inflation putting money in the pockets of consumers in energy-dependent geographies. We have to acknowledge the energy effect, but looking at consensus estimates, the Street is assuming $400+ in spending per foot across TRADE, TREND and TAIL durations, which is simply not realistic. On top of that, the Street is assuming that margins, which sit at 14% today – up from 10% historically go up another 200bps over a TAIL duration. That suggests earnings of C$25 er share, while we think this will prove to the cycle-peak earnings year of C$19. Sentiment is overwhelmingly positive, with even the sole bearish (Canadian) broker covering it has a sell rating with 20% UPSIDE to the price target. Ultimately, 7x mid-cycle TAIL earnings of C$15-C$16 = about a C$110 stock, vs C$162 today. EBITDA is really a better way to value this one, as it is massively levered…with C$6.6bn in net debt (incl C$2.3bn in lease liabilities). Each multiple turn is about C$40 in the stock price, and in the Great Recession it hit 4x EBITDA. Today it is at 6x. 2-turns down on lower EBITDA numbers and negative earnings/cash flow revisions suggests a stock below C$100. If consumer spending rallies further on strength in oil and this name goes against us, this definitely has all the makings for a Best Idea Short.
KEY CALLOUTS FOR NOTABLE RETAILERS REPORTING THIS WEEK
- Williams-Sonoma (WSM) | Taking this several notches higher on our Short Bias list. Earnings out on Wed night, and while we’re modeling a slight beat, the reality is that we think that the operating environment for the Home category has worsened dramatically over the past 10 weeks since we last heard an ultra-bullish update from WSM management. We’re clearly seeing the company revert to stepped-up promotional activity, which is likely to negatively impact Gross Margin in 2H. Yes, the stock is ridiculously cheap right now – at about 7x earnings and 5x EBITDA. But numbers are likely headed lower, and the stock should follow. Great hedge against Best Idea Long RH – which won’t even entertain the thought of discounting product to maintain top line growth.
- Nordstrom (JWN) | Best Idea Short. Though the stock is off 28% since mid-March, we think there’s a similar dynamic at play here as with JWN. The consumer spending environment has eroded materially since JWN’s ‘nose bleed’ guide last quarter of $3-$3.50 for the year. Apparel spending on dressy items (that sell at Nordstrom) were likely strong this quarter, but we maintain our view that next year’s earnings come in closer to $2 – with $1.60 of that coming from credit card income. The credit card earnings stream is worth a 5-6x Synchrony multiple, and the retail business is worth closer to 8x. Put ‘em together and you get a $12 stock. JWN at $21 today. We’d press this one on a good headline. The strength is 100% unsustainable.
- Ralph Lauren (RL) -- Short. RL is the king of the ‘guide down and then beat’ game. Outside of the onset of Covid, this company hasn’t missed a quarter in over 5-years. This go-around, we expect the magnitude of the beat to be lower, and we think that the guide-down will be greater – than anything RL has put up this cycle. We think this brand is dying, and the company is underinvesting in growth with the younger and more relevant generations on a global scale. The Street has TAIL earnings of $10 per share, though we think that the real number is closer to $7-$8. For a negative-growth, late cycle brand nearing its end with no take-out optionality, there’s no reason this shouldn’t deserve anything better than a high single digit multiple. That’s good for a $60 stock vs its current $90. People think this name is too beaten up to short right now…we beg to differ.
- Caleres (CAL) – Best Idea Long – Bullish Into the Print. We’re about in-line with ‘the Street’ (only two analysts) on the EPS line, though we’re WELL ahead for the balance of the year – including being 50% ahead on the July quarter. For the year we’re coming out at $4.68 vs the Street at $3.92 suggesting that the name is trading at less than 5x next year’s earnings – when we’re seeing the footwear category among the hottest places to be right now. We still contend that this is a prime takeout candidate in the $20s. Stock currently at $23.50.
- Ulta Beauty (ULTA) – Short. We’re below consensus this quarter for ULTA, and though a headline miss would be a disaster for the stock, the real theme here is ‘zero growth’. Comps are slowing, cannibalization intensifying, margins are mean reverting back to pre-pandemic levels, competition is intensifying (Amazon and KSS/Sephora) and even the latest company guide suggested a low single digit EPS growth rate over a TAIL duration – fueled entirely by stock buybacks. Even though beauty is a good reopening category, we think this ULTA model is completely stretched – and the stock still carries a HUGE multiple relative to the underlying growth metrics. 18x earnings and 12x EBITDA for no growth? Can someone explain to me why this name isn’t trading at 8x EBITDA? That’s 40% downside on top of the 20% sell off we’ve seen over the past month.
- Best Buy (BBY) | Best Idea Short. Our short call on BBY has all along been that a clear demand air pocket was coming, and in the meantime elevated online penetration means less warranty and credit card gross profit attachment to win sales/customers. Wage inflation continues to pressure SG&A, so all in that means sales pressure with margin compression. The consensus view has been that the stock is “cheap” as the market is waking up to the risks, but cheap gets cheaper in Quad4 with falling earnings. The news from TGT was a huge red flag for core BBY categories, as TGT warned appliances and TVs were seeing slowing demand and bloated inventory, creating the need for discounting. Add on the “new” well capitalized competitor in GME that is going after segments of gaming, computers, displays, and cell phones/accessories which has shown it is fine losing money to gain share for now. You have a stock with secular margin issues, cyclical demand problems, increasingly promotional core categories and rising competitive intensity. Despite numbers coming down recently, we think the street is still at least 10% too high in FY2023 (Ends Jan ’23). We remain short BBY.
- Dick’s Sporting Goods (DKS) | Short. We’ve been getting incrementally bearish on Sporting Goods in 2022 as we are likely to start seeing some demand reversion. DKS has executed well in the pandemic to win share and deliver strong profitability, but it won’t be immune to the demand and margin pressures despite management pleading that margins are sustainable higher. We’re bearish BGFV, DKS, and HIBB, with our Long in the space being ASO given its relative unit growth optionality while trading at 4x EPS. The market clearly sees EPS estimates across the spaces as being too high, and we tend to agree, though reversion in EPS is likely to be a bit more gradual than we are seeing in the home durables space.
- Hibbett Sports (HIBB) | Short. In recent years HIBB has morphed into an off mall Foot Locker more than a typical sporting goods store, as so much of the mix has become footwear and apparel with Nike accounting for ~65% of sales. It’s at the mercy of Nike now, which means it’s in low multiple purgatory. Like the rest of the space, the stock is “cheap”, though we think a base case EPS over the next couple years is $7, bear case closer to $5, yet the street is look for closer to $10-$11. Maybe FL’s print was a net positive read for near term trends, but we think EPS numbers for HIBB still need to come down significantly.
- Dollar Tree (DLTR) | Long. The market took a very negative view of the WMT and TGT prints in terms of DLTR’s stock reaction. We’re not sure DLTR will have quite the same earnings pressure. Sure inflation is pressuring all of retail and DLTR might have to temper guidance, but DLTR gets to capture some of the food inflation in Family Dollar comps. Consumers are returning to brick and mortar shopping, giving DLTR some incremental foot traffic opportunity at shopping centers. Then also consider that Dollar Tree has much easier margin compares as it was confined to $1 price points last year as freight and inflation were waging war on its margins. Now with easy compares, it actually has the ability to change prices from the breaking of the buck to offset the new pressures. With all of that said, we have been getting less bullish on DLTR in recent months and the name has been moving down our long list. That’s because last fall the multi-price point initiative went from moving too slowly, to full-on rush mode. We now think there is bigger risk of missteps in execution by management that can mean losing some customers/traffic. We can still build to a low double digit EPS number over a tail duration, but think we need to apply a greater discount rate around execution risk in the interim, and perhaps even a lower multiple as any customer risk would change the unit growth optionality. That means a fair price is probably in the $140 to $160 range.
