Dollar Tree (DLTR) | Removing from Long Bias list. This name has been moving lower on our list as the risk/reward was getting too thin for us in light of the Dollar Plus (break the buck) initiative, as initial data points came back mixed at best. It’s a good Quad4 stock, which has kept it on the long list, but now we think it’s time to move on. Top line compares get harder starting in 3Q and we’ve been seeing slowing traffic trends in June. Consensus estimates are far above where they were last fall, since October the consensus 2024 EPS estimate has gone from $7.90 to $10.40. The activist campaign has led to a board and management shakeup, and we think there is a lot of execution risk that we have to discount when underwriting an $11-$12 EPS power number a few years out. Over $150 this is probably fairly valued today ($156 today).
Rent-a-Center (RCII) | Taking RCII lower on Short Bias list. We elevated this in late April when incremental data points were suggesting further inflationary pressure on the low-end consumer and deteriorating credit quality, yet the stock didn’t seem to be reflecting the directional risk. Now it's 20% lower and we’re seeing inflation’s rate of change leveling out and tightening credit standards. That credit tightening actually means share opportunity for RCII, as it will “lend” in lease to own where other subprime issuers are now not willing to extend credit to consumers. Those share gains come with longer-term cycle risk if customers lose the ability to pay, but it still could mean some near-term wins for RCII while it has easy compares and low expectations after its big guide down at the start of the fiscal year. Punchline, near-term is less bearish here, but heading into a recession, the TREND to TAIL Valuation floor here is still much lower given the “bad debt” risk in earnings.
Kohl’s (KSS) | Taking KSS lower on Short Bias list. No deal at KSS as it was announced. Big win for our short call this week as we’ve been a broken record saying a deal wasn’t going to happen here, and that has turned out to be the outcome with the company announcing the end of the strategic review process after not reaching a deal with Franchise Group. Along with the deal update KSS noted that sales are trending down HSD% in 2Q, the street was at -2%, we were at -6%. So sales are slowing so far in 2Q. Don’t forget that this company has put a TON of cash toward buyback on top of the allocated ~$850mm for capex/Sephora buildouts. When does burning through so much cash start to concern the market around the debt with $2.2bn in debt and another $4.6bn in leases? Stock is now crazy cheap, but the earnings numbers are way too high. Street is looking for $6.00+ in TAIL EPS, we think the right number is closer to $3.50. Short apparel names remains one of the best alpha opportunity we can see in retail, KSS will see as much margin and sales rate of change pressure as the rest of them. Also for KSS, the consumer credit cycle remains a risk for its credit card income, but it’s not a catalyst we think will matter in numbers for at least a few quarters or so.
Gildan (GIL) | Taking Higher on Short Bias List. There has been a lot of volatility in cotton prices lately, with the price falling ~30% in the last month after a rapid rise this spring. The cause of the latest move in cotton industry reports has been attributed to investment fund activity in the commodity, but it’s definitely not good for GIL. The best cotton situation for GIL is slow, gradual cotton inflation where it can manage costs and pass through pricing periodically driving higher revenue. The rapid rise we saw in 2021 and into early 2022 puts pressure on the cost of goods. Plus, like we saw last quarter, it tends to make distributors overbuy in anticipation of a price increase. So now the channel is full of inventory while GIL has high cotton costs in the supply chain. Now if we see a sustained rapid move to the downside, we could potentially see the distributors get lean again in anticipation of potential price reductions yet with high COGS still in terms of what is coming in the chain. So that would mean building costs and rapidly falling orders demand for GIL.
MarineMax (HZO) | Elevated to Best Idea Short List last week. A couple negative demand data points for HZO this week. May PCE was reported, and looking at the pleasure boat category vs 2019, in May it saw a 750bps slowdown vs last month. Additionally, we saw a downward revision in RH’s demand trends due to Macro headwinds. If rates, high end sentiment, and market volatility are hurting RH demand, it all has to be also hurting HZO demand trends. We’re hard pressed to find a company with more earnings reversion risk than HZO – it earned ~$1.60 pre-pandemic, and is on track to earn $8.30 this year. We think that next year’s numbers get cut in half, and then cut in half again. The stock looks cheap, but valuation is irrelevant when there’s such massive earnings risk. This stock should ultimately trade at about 5x $2-$3 in EPS, or at $10-$15 – meaningfully lower than its current $36.
Torrid (CURV) | Taking off Short List. Booking the win at $4 after initially going short at ~$22 (we took off our Best Ideas Short list at $8). We still think this name is expensive – particularly given that Sycamore bought it for about $50mm nearly a decade ago, and the existential risks to the plus-size business have grown exponentially since then. But the reality is that there is a new management team in place, and they’re likely to undo the mistakes of the former team, which should stop the bleeding on the P&L. We still don’t like the model and think that the business is overearning today. But at $4, the risk/reward is far more balanced, and we can’t justify putting new short capital to work here.
Urban Outfitters (URBN) | Adding to Short Bias List. We’ve been asked about URBN several times in recent weeks, and after digging through the model, the reality is that we can’t NOT be short this name. Its inventories are way too high – particularly in the core Urban concept, and with inventories building in the channel we think that there’s gross margin pressure brewing in 2H. And then there’s Anthropologie (roughly 40% of cash flow), which put up a solid 1Q, and the Street seems to be assuming that this strength carries through to the back half of the year. That’s too optimistic given the promotional activity that we expect to be pervasive in 2H. Ultimately, we’re getting to about $1.80-$1.90 for the year with the Street at $2.35. Is that huge downside? No. But if our model is right, there’s no reason why this can’t be a low-teens stock vs its current $19. URBN is the kind of business we’d like to own at a price – defendable concepts, solid management…but we’d only like to buy it when both the Urban and Anthro concepts are down and out. We think we’ll get that chance with 3-6 months.
Allbirds (BIRD) | Moving to the top of our Long Bias list. Macro Quad 4 is the only thing preventing us from making this a Best Idea. The reality is that we think that the wholesale model BIRD is beginning to ramp up will accelerate the company’s path to turning a profit – not to mention accelerating the top line – which is key for valuation and stock momentum. We think that Nike made a major strategic gaffe by pulling back so much wholesale distribution, opening the door for growth at HOKA (DECK), Allbirds, and On Running. At $4 this stock has been left for dead, and no self-respecting institution will touch it here. Our sense is that once we’re out of Quad 4, growth will have accelerated, and institutions will be chasing it above $10. The risk/reward here over a TAIL duration is getting extraordinarily interesting.
Links To Best Idea Long/Short Thesis:
| CPRI Best Idea Long 10/25/20 | Click Here |
| RH Best Idea Long 7/18/21 | Click Here |
| CHWY Best Idea Long 12/12/21 | Click Here |
| DUFN-CH Best Idea Long 3/13/21 | Click Here |
| NKE Best Idea Long 1/17/22 | Click Here |
| PLBY Best Idea Long 4/11/21 | Click Here |
| AMZN Best Idea Long 10/31/21 | Click Here |
| DECK Best Idea Long 1/23/22 | Click Here |
| DRVN Best Idea Long 1/17/22 | Click Here |
| VVV Best Idea Long 10/12/21 | Click Here |
| OLLI Best Idea Long 4/13/22 | Click Here |
| TCS Best Idea Long 1/31/21 | Click Here |
| WOOF Best Idea Long 3/6/21 | Click Here |
| TJX Best Idea Long 3/6/22 | Click Here |
| CAL Best Idea Long 3/21/21 | Click Here |
| GES Best Idea Long 12/5/21 | Click Here |
| GOOS Best Idea Short 2/6/22 | Click Here |
| ULTA Best Idea Short 3/13/22 | Click Here |
| RVLV Best Idea Short 12/12/21 | Click Here |
| JWN Best Idea Short 3/2/22 | Click Here |
| DDS Best Idea Short 12/19/21 | Click Here |
| WEBR Best Idea Short 8/21/22 | Click Here |
| OXM Best Idea Short 12/26/21 | Click Here |
| W Best Idea Short 11/3/20 | Click Here |
| WSM Best Idea Short 6/5/22 | Click Here |
| HZO Best Idea Short 2/21/22 | Click Here |
| SNBR Best Idea Short 7/5/21 | Click Here |
| BGFV Best Idea Short 11/14/21 | Click Here |
| M Best Idea Short 3/6/22 | Click Here |
| RL Best Idea Short 1/2/22 | Click Here |
| BBY Best Idea Short 12/17/20 | Click Here |
| VSTO Best Idea Short 4/17/22 | Click Here |
