PetCo Health & Wellness (WOOF) | Taking up a notch on our Best Idea Long list. We acknowledge that traffic has been mixed at PetCo over the past two months, but that’s hardly enough to justify sending the stock down 30% in a -8% tape (with retail -16%). The category has pricing power, which we like in Quad 4, and we still think there’s upside to earnings across durations. The big hook over a TAIL duration here is that the company is tapping into Vet Services, by leveraging its 1,500 store base to add 900 vet locations. This is a massively fragmented segment of the pet care business – a $27bn TAM with 80% in the hands of independent operators. It also gives a leg up against Chewy and Amazon, who will continue to take share in pet food (most notably from grocers, Wal-Mart and Target). We get to 20% EPS upside over a TAIL duration, and our fair value all along over that duration with deleverage has been ~$30. That hasn’t changed with the sell-off over the past two months, giving us material upside with the stock today at $16.
Williams-Sonoma (WSM) | Upping to Best Idea Short list. We’re increasingly concerned about the promotional levels we’re seeing out of WSM. This company has gone 2.5 years with literally no promotions, and now our inboxes are flooded with 70% off sales across all WSM concepts. The category is decelerating, we’re likely headed for a recession, housing data is just at the start of the multi month negative report trend after the massive rise in rates, the consumer is being squeezed by inflation and data suggests shoppers are levering up via credit cards to keep consuming. Granted the biggest negative impact as of 1Q has been on the low to mid end, while WSM’s customer base, which skews a bit above that, has been hanging in better from a demand perspective (that's seen in other categories as well). But as the housing and labor environment get worse, so will home demand. The company acknowledged on its conference call that there has been a ‘slight slowdown’ in recent weeks. That demand pressure will continue, and WSM will step up the promotional cadence to protect share. That means rapid margin pressure and earnings declines. We think its margin levels are not sustainable in this slowing demand environment and that earnings expectations are headed lower, though the company is plugging a lot of stock buyback to drive some EPS upside, with a record $500mm+ in buyback this past Q. WSM makes a good hedge to our Best Idea Long RH, which has significant growth drivers from US share gains and its coming international launch, while WSM is unlikely to see 2021 EBIT levels for 3-5 years, if ever.
Vista Outdoor (VSTO) | Upping to Best Idea Short list. We think this name has downside to $20-$25 (from $37) 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 – and the CEO was on the tape with two transactions in two weeks selling 250k shares or 28% of his holdings for proceeds of ~$10mm.
OUR TAKE ON EPS FOR KEY NAMES IN THE UPCOMING WEEK
Oxford Industries (OXM) | We’re bearish on Wednesday’s print. The company likely has the Street’s $1.89 in EPS in the bag, but we’re concerned about the guide. Recall that on the last conference call – when the consumer was starting to fall apart – management looked right through consumer headwinds and talked about a consumer that is in ‘great shape’ and is ‘flush with cash’. The stock is up 15% since, with the market down 8%. Are people spending on resort-wear right now? Yes, which is bullish for Lilly Pulitzer and Tommy Bahama, which make up 98% of the company’s cash flow. But the reality is that inventory build in the channel has accelerated materially over the past 90-days, the consumer is facing increased pressure, and this is a company that is still overearning by about 400bp on the Gross Margin line relative to pre-pandemic levels. We think the real number for next year is closer to $5 per share vs the $8.90 consensus. We’d give our number 10-12x p/e, or a stock under $60 vs its current $95. We’re expecting inventories to ramp materially this quarter for OXM, and management’s tone to change notably. Best Idea Short.
Signet (SIG) | Earnings on Thursday. The short has been working. We added it in January with the stock in the high 80s, and reiterated it in April on the rally into the high 70s. SIG hit $50 a couple weeks back. The quarter will probably be “fine”, we’re at $2.44 vs street at $2.38, though we expect to see clearly slowing trends in revenue both for 1Q and the guide. We suspect we’ll see that slowing trend for the coming few quarters, and that full year and TAIL expectations are too high for SIG. Credit is a near term tailwind with balances rising and consumers levering up to make purchases while just barely coming off all-time highs in credit quality, that should inflect to a headwind by year end. Trailing sales in the category have been strong with re-opening demand and strong discretionary income levels for its core consumer, but the consumer environment is rapidly changing, especially in the mid to low end that is SIG’s core consumer. Big earnings revision risk here. TAIL EPS numbers are about 40%-50% too high for the street. Fair value here is probably around $55, but total downside is closer to $40 on Quad4 selloffs (stock currently at $62).
Academy Sports & Outdoors (ASO) | Earnings on Tuesday. ASO is our Long in the sporting goods space, where we have been net negative with BGFV, DKS, and HIBB on the short side. We expect this event for ASO will look something like a mix between DKS and SPWH results. Both of those beat, and we expect a beat from ASO, we’re at $1.48 vs street at $1.41. Recall the DKS tempered guidance for the year around elevated costs from inflation and being prudent as it relates to uncertain macro, so it’s likely ASO will do the same. It should keep expectations low, the market is certainly expecting some sort of revision with the stock under 5x the Street’s EPS. DKS didn’t communicate any actual weakness, while SPWH looks to be seeing a bit more sales pressure near term in April/May. Again from a demand perspective, ASO will be somewhere in between, but it has very low expectations around 1H demand. Solid near term gives company some extra cash to buyback stock while still investing in the new store growth. This is a retailer about to go into unit growth mode with 8 new stores this year, ramping to a rate of 80 to 100 stores over 5 years, which implies ~7% unit growth. Is that massive? No, but it is one of the better unit growth trends in retail, and should command a multiple premium accordingly. Even if there is reversion risk on revs and margins, with long term unit growth and comp potential, we think this should be trading at least 10x EPS. If the stock trades lower in the coming weeks around the consumer headwinds, ASO should seriously consider an accelerated share repurchase program. We’re coming in at $6.85 for 2022 building to EPS power over 2-3 years of $8 to $9. 1Q will no doubt slow as it’s imminently hitting tough compares on last year’s stimulus. Still we’d put fair value on this today at depressed Macro Quad4 multiples at around $50 (~40% higher) and closer to $70 in a year when out of Quad4.
Ollie’s Bargain Outlet (OLLI) | Earnings Wednesday. We think we’ll see an EPS beat for Best Idea Long OLLI, though the trends won’t be overly impressive given we’re at the last tough compare. Contrary to most of retail, OLLI actually had a rough 2021 after a standout performance in the early days of the pandemic. Now it's facing easing compares on revenue and margins while the underlying business trends are likely to improve. We’re likely in the middle of a consumer slowdown near term, and the core OLLI customer is seeing inflation pressure on discretionary spending, but it also means the marginal consumers become more cost conscious and go bargain hunting (at Ollie's) at the same time the other retailers will see inventory building, creating good closeout buying opportunities for OLLI. For NTM earnings as of 2Q22 we're getting to ~$2.80, and we think a rare unit growth story with this earning growth profile deserves a 25x to 30x PE. As the business accelerates in 2022, that gets to a fair value of the stock around $70 to $80 or about 40% to 70% upside from here. TAIL earnings power of $4.00+ with still several years of store growth to follow, meaning Tail upside to $90+. The company is being valued about 30% below where it was in Fall 2019, and OLLI is historically a strong Macro Quad4 performer.
For a replay of our OLLI Black Book from last month: CLICK HERE
