Nike (NKE) | Bullish into Monday’s print. It’s rare for us to be bullish on any consumer discretionary name in Quad 4. But the sentiment around Nike’s business momentum is more bearish than I can recall in a while, and simply think it’s overdone. Yeah, Nike put the fear of God when they did their little ‘NY Cocktail Hour’ together two months ago and several of the analysts left the event and lowered numbers. That’s shady, and un-Nike-like. But the fact of the matter is that we think revenue is tracking globally, brand heat is as strong as its ever been, and the company’s top line should surprise on the upside. Same for gross margins, which we think could be up 200bp over a tough comp last year as the DTC (shift to ecomm) story plays out. China is a wildcard, but we think its more likely than not that China growth is positive after being down 15% in constant currency over the preceding two quarters. Nike is taking share at the top end and we’re fully expecting it to show up in numbers. All in we’re coming in at $0.96 per share, versus the Street at $0.81. This is the last quarter of NKE’s fiscal year, and our rather strong view is that the business units downplayed business momentum and elevated logistics costs increases to reset lower expectations just to come out ahead as Nike closes out its FY. That’s how the rank and file gets paid – by beating expectations -- and get paid they will. This company is all about beating expectations. Our TAIL call is that Nike will maintain 10%+ growth globally while pushing margins from 15% today to 20% over a TAIL duration, which builds to $7+ in EPS power with the Street sitting at $6.. Also remember that Nike will start to more aggressively grow with wholesale partners that ‘made the cut’ and didn’t get eliminated (like DSW, BIG 5 and countless others). As such, backlog is growing, at the same time supply constraints are normalizing – top and bottom line bullish. This stock is down 32% since November – 2x the rate of the S&P. Now sitting at 25x consensus numbers – closer to 22x ours. During Quad 4, the trajectory of revenue, margins and cash flow (the PODs) means everything to us. And we think Nike is executing like we need to see to keep this as a Best Idea Long. Over a TAIL duration (outside of Quad 4) we think we’re likely to test a 30x multiple again on $7+ in EPS power, which gets us to a $200+ stock. Is this a multi-bagger like CPRI, RH, CHWY, PLBY? No…but doesn’t carry the risk either. We like this name a lot here.
Ulta Beauty (ULTA) | Short it now. #2 on our Best Idea Short List behind GOOS, though ULTA inching closer to the #1 position. We’re presenting a Black Book on Wednesday where we’re going to outline the major structural changes happening to the business that are counteracting the ‘reopening effect’ in the beauty category that is temporarily buoying ULTA’s comp. We’re going to take a deep quantitative dive into the cannibalization between ULTA and its Target Shop-in-Shop initiative. We’ll also work through the store overlap between the KSS/Sephora rollout and its likelihood to increase the competitive landscape over a TAIL duration – not to mention the effect of Amazon getting heavier in Prestige beauty. All in, on top of a revenue deceleration, these factors should result in ULTA giving back ~400bp in gross margin – resulting in a msd Gross Profit growth rate for 2-4 years. Then there’s SG&A – this company is running too lean, with employee counts below pre-pandemic levels, which is detrimental to a service-oriented business. The P&L factors simply don’t add up here. Well…they do add up – to a low single digit EBIT growth rate, with the only EPS growth coming from ULTA buying back stock at the top. At $411 this name is trading at 20x earnings and 14x EBITDA. With the growth characteristics ULTA will be putting up in the coming years, we think it gets re-rated well below 10x EBITDA – and there are plenty of examples of big-box retailers that have done so over the last 30 years. I struggle to find a single investor that is the incremental buyer of ULTA here. The PODs are going the wrong way – structurally. At 8x EBITDA, which is far more than a possibility in Quad 4, this stock is worth closer to $200, or 50% below current levels. The key though, is that after we exit Quad 4, the existential threats to the business will be stronger, not weaker. This name should continue to drift lower, sometimes violently, as the risks accelerate and margins mean-revert in a slowing growth environment.
Weber (WEBR) | Taking Higher on Best Idea Short list on last week’s squeeze. WEBR saw a no news “meme” type squeeze. It makes some sense as a target, it has high short interest, limited float, and a tight borrow where fees have been upwards of 50%+. But as it relates to the longer term squeeze success, there are a few reasons we’d say it’s less likely to succeed compared to some other meme stocks of last year. One, we are in Macro Quad4 not Quad2, squeeze rallies have been short lived since the pivot out of Macro Quad2 last year and high short interest is generally a style factor that works short side in Quad4. Two, there is no fundamental catalyst here, business trends are slowing the company just had to revise down profit expectations significantly. The stock is very expensive on those revised numbers, with high leverage. This isn’t a no debt retailer trading at 5x EPS with business trends accelerating like we saw last year. Three, insiders that took this public own a ton of stock and are looking to sell, so a rally gives them the window to dump stock. It’s a lot like you saw with BGFV last year, the meme stock rally gave the Big Five CEO a window to dump millions in stock at prices he likely never expected to see again. Any WEBR insider sales will also increase the float, giving more borrow for the short sellers to pressure the stock further. Ultimately think this equity is worth almost nothing, though given the amount of shares held by the sponsors, this likely goes private around a buck or two before it hits zero…. Currently trading at 18x consensus EBITDA, and a consumer durable like this is worth something closer to 5-6x. Once we hit that threshold, there’s ZERO equity value left. WEBR is a Best Idea Short.
