Canada Goose (GOOS) | Taking this name to the #1 slot on our Best Ideas Short list. We think that this name is in trouble. The company’s latest quarter sent the stock higher, but we think that the upside came from selling excess inventory to ‘pseudo luxury’ off price channels. The company and the retail channel is choking on Canada Goose inventory, and we think that the company should have lowered expectations in conjunction with earnings – but instead, it kept the hope alive that it will sell through its bloated inventory of parkas and base-layer apparel at full price, which we think will be highly unlikely in 2H22. We have a hard time modeling anything as high as $1.00 in EPS, and the Street is sitting at $1.30 for the year. The stock looks cheap at 15x earnings relative to its history, but the pricing model of this brand is breaking down. With that comes either a 2H miss or downward revision, and we think the multiple will follow to something closer to 10-12x EPS. That gets us to about a $9-$11 stock, which is better than 50% downside from current levels.
Ulta Beauty (ULTA) | Moving ULTA up to #2 on Best Ideas Short List after a superb print – but one that’s not sustainable. Yes, beauty is a great reopening category, but we think that trends in the back half will slow. Combine that with slowing square footage growth, cannibalization from its own shops inside Target, increased competition from both Amazon and Sephora (growing from 200 shops inside KSS to 850), and we get to the top line slowing to mid single digits over a TAIL duration. Then tack on the fact that Gross Margins are currently running just over 40% compared to 36% (like clockwork) pre-pandemic, while the company was abundantly clear on its last call that it will do what it takes to protect market share, and we get to low-mid single digit Gross Profit growth. Then tack on rising store labor costs and we get to EBIT growth closer to zero. The only real EPS growth you get with this name is from share repo – and we think that the company is buying back stock when it CAN, not when it SHOULD. The punchline is that the Street is in love with this name, and it still carries a 21x multiple (14x EBITDA) on what we think will be close to zero operating profit growth over a TAIL duration. We’re modeling a $20-$22 per share EPS annuity over a TAIL duration, which is worth a single digit EBITDA multiple at best. That gets us to about a $250 stock vs its current $425. We have zero clue as to who the incremental buyer is of this name at current prices. This smells like Bed, Bath and Beyond 20-years ago.
Revolve (RVLV) | Moving up to the #3 slot on our Best Ideas list. Yes, the short has already worked well for us – down ~60% over the past six months. But growth is slowing here materially, negative inflation spreads are likely to clip Gross Margins in 2H as the environment gets much more competitive due to uncontrollably high inventories channel-wide in the face of rising input costs – and yes, this name still carries a serious multiple to it. People might say it’s cheap based on a trough EV/Sales multiple of 1.6x (real trough was 0.72x in March 20) – but we’d argue that people need to look at earnings and cash flow – and it's trading at 21x earnings and 13x EBITDA with meaningfully slower growth ahead. At best we’ll give it a 12-13x p/e on a $1.50 EPS annuity once people realize the lack of EPS growth here (sales growth offset by margin dilution), or a stock of below $20 vs the current $30 price.
Ralph Lauren (RL) | Moving this one from Short Bias List to Best Idea Short. The best bull case we continually hear about RL is that ‘the stock is cheap’. We’d argue a couple things there…first, this stock was built to be cheap. The brand is dying, the company is failing to get the brand to gain relevance with younger consumers. In one of the biggest shifts we’ve seen toward dressier (Ralph-esque) apparel this cycle, the company put up flat revenue to 2019 in the latest quarter. The consensus has earnings building to $11 over a TAIL duration, while we think the real number is $7-8 – in line with pre-pandemic levels. We think that’s worth a high single digit multiple – which gets us to a stock starting with a $6-handle, compared to its current price of $99.
Williams-Sonoma (WSM) | Taking this one higher on our Short Bias list. The company executed well in its latest quarter, beating the Street handily and sending the stock up 18%. But we think that the company is stepping hard on the promotion pedal to keep sales moving along, which is NOT what we want to see a company do in this space. Management noted that business has slowed in recent weeks, and we don’t think that the Street is appropriately modeling Gross margins in the back half of this year and in 2023. This category isn’t toxic like apparel will likely prove to be in 2H, and the stock is trading at about 6x our EBITDA estimate which is not egregious. But we think that expectations are likely to come lower in 2H, which puts pressure on the stock. Knowing what we know today, we’d make this a Best Idea short with the stock above $150 ($130 today).
NOTABLE EARNINGS FROM OUR TOP 3 BEST IDEA LONGS THIS WEEK
Capri (CPRI) | It’s interesting that short interest has risen here to its highest level in 2-years over the past two quarters – as we think bears will need to lick their wounds once again on Wednesday’s CPRI print. We’re north of $1.10 for the quarter, with the Street sitting at $0.82. Despite weakness in the high end and negative wealth effect, we think the Michael Kors brand remains healthy, is seeing minimal discounting in its product and should put up revenue growth in the mid-teens at margins in the high 20s. Versace and Jimmy Choo should also build upon the robust growth trends from last quarter, resulting in EBITDA of ~$230 – or about 20% ahead of the consensus. We also think that the company will prove to have leaned heavily on its repo activity this quarter, as it should, which accounts for about $0.05 per share of our upside relative to the Street. When all is said and done, the company should earn over $6.30 for the year ended March, which is within striking distance of the $6.50 the Street is modeling for next year. Note that we’re at $7.30 for next year, which is largely driven by growth and margin improvement at Versace and Jimmy Choo. We think that the company is likely to straddle the Street with its guidance for next year – even though we think the earnings power is materially higher. We won’t blame them…there’s little reward in this market for putting out an optimistic guide. Ultimately, we think that CPRI is worth $80 TODAY, and $190 by the March26 year. We’re very comfortable with this name occupying the number one slot on our Best Ideas long list.
RH (RH) | What could go wrong? Yes, that was sarcasm. CEO Gary Friedman’s now infamous ‘gloom and doom’ tirade about weakening demand, inflating costs, worsening logistics and an abysmal macro climate from last quarter’s print has made its rounds to people that don’t even care about RH. Since that print in March, the stock is down 25% and broader equity indexes are down 10-15%. The consumer has gotten worse, logistics have not gotten better, interest rates are up, and the Macro environment is clearly worse right now, and the prospects of an outright recession have gone higher. Fortunately, we think that he set top line expectations at a very appropriate 5-7% level, though we have yet to talk to even the biggest bulls that think that the company will come out ahead. That’s a good thing…expectations are low. We think that the Street’s $5.40 EPS estimate is about right. The elephant in the room is what GF is likely to announce along with this quarter as it relates to doing a massive accelerated share repo just ahead of what we think will be a meaningful acceleration in the business in 2023. The numbers don’t lie…at end of 1Q RH should have around $2.3bn in cash (including the recently announced $500mm term loan). That’s 8mm shares at the current price. If we adjust for shares owned by the CEO, short interest and a few big long term holders, you’re talking about half of the ‘adjusted’ float in cash. Back in 2017 the company did a rapid buyback, if you don’t remember. It preannounced 4Q16 in February 2017 while also announcing a $300mm buyback program. Then on May 4th, it announced another $700mm in repo after the $300mm was used up. Just over 2 months later on July 14 the $700mm was done, and roughly half the floating shares were taken out, and the stock went from ~$25 to $75 over 5 months. We think history is highly likely to repeat itself here. We actually think that the biggest risk to the print is if the company pushes out the European rollout by a year. The reality is that getting construction/building materials in the UK is extremely tough right now. DO we think that the company is on track to open this year? Yes. But a delay would cause us to push out our top line numbers in our model by a year, which isn’t what we want to see. Longer term, we’re hard pressed to find any name in global retail that has the kind of top line growth trajectory as RH. We have revenue doubling over a TAIL duration to over $6bn, and we think that a 27% margin is very much doable – as International growth is at a higher price point and should be accretive – even after ‘brand building’ costs. On a share count 25-30% below what we’re looking at today, that suggests about $60 in EPS power, with the Street modeling that earnings tops out at $36. If we’re right on those earnings, then this name is likely to get a global luxury multiple to go with it – that’s 25-30x earnings -- or a stock between $1,500 and $1,800. Yes, you gotta be patient with this one. The volatility with the near-term macro cross currents is downright painful. But the reason why we’re likely to see such an aggressive share repo today is that management’s math is likely eerily similar to ours. Over a TAIL duration, this name is massively attractive at the current price of $291. Longer term, this name has far better upside than CPRI. But it sits at #2 on our BI List due to the near term volatility.
Chewy (CHWY) | CHWY earnings on Wednesday. The stock has been under pressure in 2022 like most of consumer growth and ecommerce. The company has seen slowing growth trends as US online demand has seen normalization, though Chewy has actually continued to grow revenue, unlike many online peers. Margins have been under pressure from inflationary costs on COGS and labor while the company continues to invest for growth. The cost pressure with lower growth means the EBITDA unlock has been postponed. That has driven the company to new trough valuations on EV/gross profit, with a growth adjusted view of that same metric right around all-time lows (chart below). Online interest for Chewy looks solid though, with accelerating trends in recent months, and the company is nearing the launch of its insurance offering being executed in partnership with Trupanion. We think top line trends will start to look better soon and margins hit a trough around mid-year with inflation pressures still likely a problem in 1H. By 2H the P&L should be seeing accelerations on revenue and profits, meaning the multiple will start to expand. This is a great brand in a great consumer category which continues to show growth. The CHWY EV is below where it was at the end of 2019, yet the customer base is nearly twice the size, and the gross profit value has more than doubled. Unlike many other online covid winners, the vast majority of revenue here is sticky with customers staying on the platform, using autoship, and ramping spending over time. With the P&L inflecting, and an exit from Macro Quad4, we think the stock can go back to the $75 range over 12 to 18 months – a huge move from its current $27.
