Ticker Speed Dating Call: Tomorrow Tuesday June 21st 10am
Live Video Link: CLICK HERE
BEST IDEA SHORTS
GOOS ($18) | The brand is cracking. The channel is choking on inventory, and GOOS beat last quarter because it unloaded product to off-price online sites. Numbers this year are not doable. Story breaks within 2 quarters. With the downward revision comes a lower multiple. Worth $10.
ULTA ($395) | Unit growth slowing, cannibalization increasing (TGT shops), Amazon and Sephora/KSS becoming more competitive. Margins unsustainably high. TAIL EBIT growth in low-single-digits. ULTA buying back stock at the top. Should be a $200 stock.
RVLV ($29) | Still a lot more downside left in this name. Growth sharply decelerating. Becoming over-assorted, which presents big gross margin risk. This company has $1.50ps in earnings power in perpetuity, and is likely worth a low teens multiple on that in Quad 4 = $20-$22 stock.
JWN ($25) | Underlying earnings power once we get out of ‘high end closet restocking’ is about $2.00ps. $1.60 of that is credit income, and the closest comp is Synchrony, which trades at 5x earnings. There’s 8 bucks. Then lets be generous and give the retail business 10x – there’s $4. Bottom line, JWN is worth about $12 over a TAIL duration. In Quad 4 the family can’t get financing to take it private.
DDS ($273) | One of the most over-earning retailers out there. Put up $500mm in EBITDA pre-pandemic, but now because of closet restocking and no discounting, it just put up $1.3bn. NOTHING has structurally changed except the share count as the company has been buying all the way up. Next year both EBITDA and the stock should be cut in half.
OXM ($89) | OXM is the ‘apparel brand’ version of DDS. It’s on track to earn $10ps this year due to peak sell through with no discounting at Tommy Bahama and Lily Pulitzer (which together are 98% of cash flow), while the real underlying earnings power is closer to $5.
WEBR ($8) | Growth is slowing like we’re seeing across consumer durables, and competition is intensifying. Yet this stock carries a 7x EBITDA multiple on consensus– given the likely earnings reversion, it’s probably worth 3-4x, which leaves us with ZERO equity value given the debt on the balance sheet. We’ve said all along that PE will likely take this private again closer to $2.
W ($46) | Losing share across the board – to brick and mortar like WSM and online to OSTK. Need to enter cost cutting mode…fast…before liquidity issues arise. This stock could get cut in half yet again in a prolonged Quad 4.
SNBR ($34) | If you believe the guide, the stock is probably approaching fair value after being down 78% from the peak. But this company has among the worst forecast accuracy in retail. The industry over-consumed in the mattress category by 20% during the pandemic, and the leverage to the downside is going to continue to be painful. We like this short down to $20.
BGFV ($12) | This company earned $0.43 per share before the pandemic – and then benefitted from the surge in outdoor sports equipment that took earnings to ~$2.50ps. Then Nike fired BGFV as a customer. As the business mean-reverts, and ASO and DKS open stores in its territory while NO LONGER having Nike as a traffic driver, real earnings power is close to Zero. This company is unlikely to exist in 5-years.
M ($20) | Structural share loser that is over-earning much the way we see at JWN and OXM. The business was falling apart before the pandemic hit with earnings down 30% in Jan 20. Now mean-reversion in sales, rising inventories, negative inflation spreads and subsequent discounting likely to make for a very rough 2023. Real earnings power is 20-30% below consensus, with little optionality for real estate sales or spinning off e-comm. Bull case around cost cuts makes no sense to us.
HZO ($37) | High-end boat/Yacht sales exploded during the pandemic, and we’re already seeing signs of it slowing down. This company earned ~$1.50ps pre-pandemic, and is now on track to put up $8.30 this year – which the Street is straight-lining into perpetuity. We’ve seen this story before – back in ‘09/’10. Earnings don’t come down in drips and drabs like with apparel companies here…We’re talking $3mm yachts. This ends violently.
RL ($90) | Brand losing relevance with an aging customer base. Consumer connectivity is weak. Numbers are elevated due to minimal promotional activity. Co tried to sell itself and failed. Huge key employee risk given how involved Mr. Lauren is in day-to-day ops. Real underlying earnings power is closer to $7-8, and is likely worth 8x earnings = 40-50% downside from $90.
BBY ($71) | Big pull-forward in demand during the pandemic. Lack of store traffic makes it difficult to sell warranties, which is 40% of EBIT. Credit is another 20%. Still another downward revision here. Knowing what we know today we’d cover closer to $60.
VSTO ($32) | Earned $0.50ps pre-pandemic. Just earned $8.29 in latest year. Consumer stockpiled ammunition (~80% of cash flow) during the pandemic and social unrest. Company plans to split up in CY23, but business likely to fall apart before then. Real earnings power closer to $3-4ps, and worth about 5x EPS. Suggests ~50% downside.
WSM ($119) | After 2.5 years of ZERO promotions, WSM is back to its old practice of dropping prices to drive its top line. It’s B2B business is legit, though not without its own cyclical risks. There’s 200-300bps in Gross Margin risk to this model as WSM chases top line. We like this one as a hedge to our RH Best Idea Long. If RH heads lower, WSM should go down a lot more.
BEST IDEA LONGS
CPRI ($45) | Very defendable category, even in Quad 4. Michael Kors cash cow funding growth in Versace and Jimmy Choo, both of which will more than double in size over 3-years with margins 2x where they are today. EPS upside is clear to us over TRADE, TREND and TAIL durations. TAIL triple with defendable downside. Company aggressively buying stock.
RH ($245) | Our favorite TAIL story in retail. Business is hurting today as RH’s affluent customer is pulling back on spending. But RH Europe opens this summer, then half a dozen European markets over next 3 years. Consensus is materially underestimating the impact of Europe and the launch of RH Contemporary, as well as the speed at which the company will deploy its $2.4bn in stock repo authorization. We get to ‘super TAIL’ (5-year) numbers of $68 per share vs the Street at $30. If we’re right on the earnings, the margin and ROIC characteristics combined with one of the best competitive moats in global will give this name a serious multiple. We look crazy today (in Quad 4) for saying this, but this stock has runway to $2,000.
CHWY ($29) | After 1.5 years of slowing growth and rising cost pressure, we’re at the point where the rate of change should start to reaccelerate in top line for this dominant player in a great consumer category. Worth noting that the stock is trading right at pre-pandemic levels, while in the interim it acquired 7mm customers that are likely to stay with CHWY for the lifetime of the pet (and potentially beyond). We’ve seen large insider buys in recent weeks, which is very notable. Still massive call option to take this business model overseas. If we’re right on the business acceleration, we wouldn’t be surprised to see this stock at $75 by the end of CY23.
DUFRY ($3 – ADR) | This is our travel-retail recovery play. Emerging from the pandemic stronger than it went in due to renegotiated leases with Airport Operators, and cost cuts in its model that were needed in the wake of acquisitions over the past decade. Should be 11-12% EBIT margin business compared to 6-7% pre-pandemic. Big call option on Alibaba JV in Hainan starting in ’23. Food and Beverage-related M&A on the table. And if the stock is still at this price in a year, we think it goes private (Advent).
NKE ($107) | Doing all the right things to take control of its own distribution and tier product by channel, consumer, and price point (1,500bps margin accretive). EBIT margins should push 50% for the first time in the company’s history. After pulling back from wholesale distribution over 4-years, will finally start to grow with remaining wholesale accounts starting this fall. $7 in EPS power by FY25(May) vs $3.50 today. We’re 20% ahead of consensus.
PLBY ($7) | Did I EVER think that PLBY would hit $7? No. My worst Quad 4 Long call. But the underlying, growth, profitability, cash flow and core business drivers are all 100% on track. You need patience on this one, but to put it into context, the market cap of PLBY today equates to what PLBY paid for its acquisitions since it started trading. Even if we assume that it overpaid by 20%, the market is implying that the optionality of one of the most well known and licensed brands in the world is worth close to ZERO, which just makes no sense. I get it, the Quad 4 style factors are all wrong. But once we get into a better Macro climate, the market should begin to discount the value of CENTERFOLD and the ecosystem that the company is building around sexual wellness – nevermind cosmetics, spirits, on-site entertainment, music, etc…One of the most fundamentally mispriced securities in retail today.
AMZN ($106) | The thing I like most about AMZN is that while growth was decelerating, and profitability was under pressure, the company stepped UP its SG&A and Capex to gain share when we come out the other end. That’s something that only top-tier companies do that don’t care about the quarter, but rather long-term value creation. This is ‘Hedgeye POD analysis’ 101. Expect meaningful acceleration as we exit Quad 4 – and even before then – if our model is right.
DECK ($250) | I put management of DECK right up there with Nike as it relates to tiering product by channel, price point and consumer. It did it with Ugg, and is taking a page out of the same playbook with Hoka. Ugg is one of the best cash cows in retail – and the bear case for 10-years is that it can’t ‘comp the comp’ – and its been wrong more often than not. Hoka continues to launch new platforms, and is prioritizing performance running shops, including the 300-400 DKS stores where the retailer is ‘premium-izing’ the footwear experience. Growth in Foot Locker is an added kicker as Nike reduced allocations there. At this price you’re paying for Hoka and getting Ugg for free. This is a TAIL triple.
DRVN ($26) | We’re fans of the auto aftermarket business, for the most part, and think that DRVN is a great way to play that. The knock on the model is that its partially a roll-up, and I generally HATE rollups. But the deals are accretive almost immediately, and we think that management is going to hit its $850mm EBITDA target two years early. Numbers are way too low here – Quad 4 or no Quad 4.
VVV ($29) | We think a business separation will unlock the value of Valvoline Instant Oil Change (VOIC) either by a spin, or an outright sale of the consumer goods business (motor oil). This gets us to a value of $45-$50. Not exactly a double or triple like many others on this list, but downside is very defendable, as VOIC is one of the premier assets in all of Auto Retail.
OLLI ($58) | One of the few names on this list that shines in Quad 4. The consumer trade-down effect is very real, and accrues to OLLI’s comp and margin. DO we worry about the company’s goal of hitting upwards of 1,000 stores over time? Yes. Not sure the off-price model in hard goods is quite that scalable. But stores here can easily double, which we’re banking on. We think this can be a $70-$80 stock by year end.
TCS ($7) | This model has been left for dead… yet has delivered stable sales and comp results for years at the same time home organization is emerging as a longer term consumer trend that will long outlive the pandemic and cannot be shopped easily online. In addition, the company is about to embark on a store opening program, which should definitely give it a multiple boost once it starts adding stores, We don’t think institutions will start paying attention to this name until it’s in the mid-teens, which we expect by 2023 and a stock of $30 over a Tail duration.
WOOF ($16) | We’re huge fans of the economics around building 900 vet clinics in its 1,500 stores. Category very defendable, and its making its model ‘CHWY proof’ as the vet clinics option is one thing Chewy can’t do. It also gets the chain into pet meds, which is very profitable, and overall makes for a very sticky ‘one stop shop’ for pet parents. Our numbers over a TAIL duration are 40% ahead of consensus, and our fair value is and always has been $30. With the stock at $16 today, it’s tough not to do the work on.
TJX ($57) | If there’s one trend that is unmistakable in Retail it’s that apparel inventories are rising, and both brands and retailers (especially department stores) will have to find a home for the excess goods. That’s very bullish for off price channels, especially TJX. Admittedly, ROST and BURL will see greater leverage to this trend, but as we saw in the latest earnings season, there’s also far greater risk to those two as well. TJX is one of the best managed companies in retail – 20 year charts don’t lie. TJX is best equipped to handle the excess inventory here – both in-season and packaway. Will this stock make you rich here? Probably not, but it’s got reasonably defendable downside, and we can build to $5.00 in EPS over a TAIL duration. That’s good for a $100-$125 stock. We’ll take it.
CAL ($27) | Perhaps with the exception of DUFRY, this is our model likely candidate for a take-out by private equity. Management is outstanding, the Famous Footwear business is about to reaccelerate with Nike, and the branded portfolio is benefitting from what we think is a multi-year boom in footwear sales. We get to $5.50-$6.00 over a TAIL duration, and it’s sitting at 5x those earnings. Upcoming quarter looks good, and we think numbers are headed higher.
GES ($18) | GES put up a sloppy quarter two weeks ago – while we didn’t like the headline miss, the reality is that the underlying brand heat is very much intact, and we’re seeing management execute here better than 90% of apparel retailers. With all of that said, it kinda blows us away that 21% of the float can be held short when the company is executing this well, has an Accelerated Share Repo program in place that will take it through July (after which it is still likely to buy back stock), has an activist circling, management has a huge compensation incentive to get this stock over $35 – the lever triggers this month, and above all that, the stock is trading at less than 5x earnings – or closer to 3x our TAIL EBITDA estimate. We think this name has meaningful downside support, and after peeling back the onion, really liked what we see as it relates to management execution.
