Weber (WEBR) | Taking Higher On Best Idea Short List. A month after the company’s weak earnings, our conviction continues to rise on this short. The only thing keeping this from going lower fast is that the core private holders that took this public still own over 90% of the shares outstanding and ~60% of the floating A shares. We saw an insider sale a couple weeks ago, then a debt rating downgrade from S&P, and an exec departure announcement this week. The category is reverting and grills just passed the peak selling season around Memorial day. Earnings are headed lower while leverage sits at about 7x Net Debt to EBITDA. At a low DD EBITDA multiple, this stock is worth around $1 to $3 at best vs trading at ~$7.50 today. There’s no reason this name shouldn’t trade at 7-8x EBITDA, implying ZERO equity value – though we suspect that it will be taken private again before the equity value completely evaporates.
Best Buy (BBY) | Taking This Lower On Our Best Ideas Short List. We’ve been short this name since the fall of 2020 when the stock was around $120. We’re getting to the latter end of this short call, though we think we’ve got at least one more downward earnings revision event, and think that the TAIL street numbers remain 20%-30% too high. But the market and sell side are waking up to the risks in 2022. An air pocket in demand was core to our bear thesis and a slowdown in core BBY categories has been clearly signaled by TGT in recent weeks. Since the start of the year street estimates for this fiscal year have come down 85 cents, or 9%, getting closer to our number, though we think there is another 5% to 10% or so downside to fiscal 2023. Stock is yielding nearly 5%, and short interest is up to 7%, about 3.5yr highs after sitting in the low single digits for much of the pandemic. BBY’s EV is sitting at levels below late 2019. Best Buy is also about to see much easier growth comparisons starting in 3Q.
Dick's Sporting Goods (DKS) | Taking Lower on Our Short Bias List. In the last 2 months, DKS has traded down from $107 to $77. Short interest is up to 26% (though partially due to convert hedging). Stock is trading about 7x PE even after the guide down. Management took down 2022 numbers despite nothing in the 1Q print to suggest any weakness. We think sporting goods is seeing reversion, but the earnings risk is likely to be much slower than others, and there is lots of buyback capacity in the interim with the stock at a 14% FCF yield. DKS has improved the model and the assortment particularly in athletic footwear growing its relationship with Nike and becoming the first mass wholesale relationship for the ultra-hot running shoe brand Hoke One One. We’re still net negative on sporting goods given demand reversion, but DKS is pricing in more of that risk, and now with lower earnings expectations. ASO is the long we like in the space (see below).
Gap Inc (GPS) | Taking Higher on Long Bias List. GPS is trading sub $10. Athleta is now arguably worth more than the entire enterprise value of the company, while accounting for only about 10% of sales. This is ripe for an activist. Separate out the Athleta business and clean up Old Navy, Gap, and Banana. Management has failed in one of the best apparel selling environments in decades, giving an activist plenty of ammo should it come down to a proxy battle. GPS actually has some of the easiest coming compares in apparel as well as it was seemingly the only apparel retailer to have significant issues around supply chain late last summer that caused lost sales and margin pressure, so rate of change is also in GPS’s favor in a couple months. For our note after the last print see GPS | The Final Straw.
Academy Sports & Outdoors (ASO) | 1Q Solid, Remains High On Long Bias. The company put up a solid 1Q print with EPS beating by 23% on comps ahead. The company then took down the lower end of the full year, citing prudence around macro, despite not specific callouts or 1Q trends to suggest it had to. This is smart given where the stock is trading. With a stock trading at 4.5x PE, the market expects some earnings pressure, so signal some. Management reiterated its gross margin guide, expanding which has been a key initiative in its entire public history. Once the market realized that earnings rates aren’t going down much or at all, this stock will not remain at sub 5x EPS. ASO is now opening stores again with some fill-in stores in current markets and opening up new markets with stores in states is hasn’t been before. Unit growth is retail is rare, and with 80 to 100 stores over 5 years, which implies ~7% growth rate. This will see incremental revenue and cashflow from that growth, and ASO will get a better multiple. This is a best idea candidate If the stock doesn’t rally by 2h and when we get out of quad4. Our ASO note from after the 4Q earnings ASO | Massively Mispriced.
