Allbirds (BIRD) | ‘New’ Best Idea Long. Let’s get this out of the way…after dropping from $40 post IPO to $18, we went long BIRD – and we were wrong. And we’re #accountable for that call. We took it off our Best Idea list at $9 over fears that it would head lower in Quad 4. Lo and behold, the stock got cut in half again and now sits at $4.92. Style factors in Quad 4 have been brutal for the BIRD, but as we look at the forward growth trajectory, the new platforms, and the changes in distribution, the outlook is arguably better today than when the company IPO’d at $15. Specifically, we think that Nike is making a major strategic mistake by pulling back on too much wholesale distribution, which is opening up valuable physical real estate for the trio of athletic brands that emerged in recent years – namely HOKA (DECK is a Best Idea Long), Allbirds, and On Running (Short Bias – valuation). In Allbirds’ case, it’s starting off with wholesale distribution in Nordstrom in 2Q, and we expect that to accelerate in the coming quarters. There’s no better way to build a brand’s consumer awareness than with a wholesale model, and it will ultimately slingshot its way back to BIRD’s DTC model. The elephant in the room is that today, BIRD loses money. It lost ($0.65) per share last year, and is likely to lose ($0.30) this year. But make no mistake, the footwear business is ALL about scale, and we see this building to a $1bn business over a TAIL duration with earnings of $0.60 in three years, and EBITDA pushing $200mm. That’s VERY notable when the entire EV of the company has been decimated to $500mm. So we’re looking at the name trading below 3x TAIL EBITDA, which is simply a joke. Yeah, I get it…it’s Quad 4, there’s no current valuation support, and under $5 the stock is at a point where no self-respecting institution wants to give it a look. But growth appears to be accelerating (especially with the launch of its wholesale model), the company is delivering on new platforms like a brand twice its age, and if we’re right on the model, this name should trade at better than 10x EBITDA, which is a 3-4 bagger from here (ie back above its IPO price). In the meantime, with the stock under $5, you’ve got 33% of the market cap in cash, and no debt. You need duration on this name, but ultimately we think institutions will start to give it a look again after it doubles from here.
Inter Parfums (IPAR) | New Short Idea. We’re going much deeper on the beauty space, as best evidenced by our Best Idea Short on ULTA – which we think has material downside from here. But we’re making a shift in our coverage approach and are going to be covering the brands that sell vertically into Prestige Beauty channels. One of the first that jumped out at us is Inter Parfums, which is one of the dominant licensees of fashion brands that come out with their own fragrance lines. IPAR’s portfolio consists of brands like Abercrombie, Guess?, Oscar de la Renta, and MCM, to name a few. To be clear, this isn’t a bad company – as it’s a competitive bidder on almost every mid-tier fragrance that comes to market. Does it compete in the ultra-high end, like Creed, Roja, Tom Ford, and even Jo Malone? No. It does not. It’s more at the ‘accessible’ (ie less desirable) end of the fragrance market. We generally dislike business models that rely on third party brands for intellectual property – as there is ultimately no terminal value in the model as the brands can easily switch fragrance providers. The models are lumpy as licenses expire – which opens the door to a blow up every few years. We’ve vetted the license portfolio, and don’t see imminent risk in losing a brand, and in fact, IPAR just brought on two new deals over the past year – Salvatore Ferragamo and Emanual Ungaro. Neither are ‘hot’ or ‘must have’ fragrances, but they should keep the top line moving for much of the next year. The problem is that this is a 13-15% margin business over time (and pre-pandemic), and like much of beauty today it is over-earning as special occasions resume and the social economy reopens. Today IPAR is sitting at a 17.3% EBIT margin, which is absolutely unsustainable. And yes, you guessed it, the Street (only 4 analysts) are straight-lining that margin level in perpetuity. We’re modeling a mean-reversion in margins next year, which takes us well below the consensus – and should result in a flat year in 2023 for IPAR. This is a perennially high-multiple and under-shorted stock, and it currently trades at 23x earnings, 14x EBITDA, and only 2.3% of the float is short. There’s no reason why this name can’t trade at a mid-high teens multiple if our model is right next year on flat-earnings, which suggests a $50 stock versus its current $72, or 30%+ downside. As is our process, this name is starting near the bottom of our Short Bias list, and will go higher as our conviction in the research call (or the price) goes higher.
TJX, Inc (TJX) |Moving Higher on Best Idea Long List. If there is one trend that is unmistakable in the world of retail today, it is that apparel inventories are building across the board – except perhaps at the ultra-high end (ie Versace-esque apparel). We already saw inventory problems erase virtually all of TGT’s margin gains during the pandemic as it looks to clear product (much of which is apparel), and we think that Wal-Mart pushed off fall deliveries by three weeks just to give it more time to clear summer apparel inventory. If there is any clear-cut winner when apparel inventories are rising, it is TJX. Not necessarily in the current selling season, as it has to compete with the rest of retail. But the company’s buying organization is on overdrive right now buying premium apparel at heavily discounted prices for 2023, which should lead it meaningfully outperform over the next year operationally. We’re still mildly concerned about HomeGoods as that category is under fire, and that’s 20% of the cash flow base. But we’ve got that factored into our model and are still coming out ahead of consensus. We’re 10% ahead of consensus in each of the next three years for TJX, with CY25 earnings of $5. Today TJX is trading at 16x our NTM earnings number, which is trough for this name. We want to be careful about referring to ‘trough multiples’ when we’re in Quad 4 and likely headed into a recession. Multiples can always go lower. But this is a rare high-quality counter-cyclical name in retail that should accelerate over the next 12-months, while most peers are going in the other direction. If our numbers are right next year, then this name is likely to trade at better than 20x earnings again, which gets us to over 40% upside from current levels.
Bed Bath & Beyond (BBBY) | Taking to the Bottom of short Bias List (from the top). This name is – very appropriately – down 85% from the squeezy activist-driven peaks, and now sits at a measly $5, or $407mm in market cap. The ‘rock star’ management team that was put in place by the activists has flat out failed, and subsequently been fired. The business is comping down horribly with little hope of recovering, and the company is going as far as turning off the a/c in stores to cut costs. With 37% of the float short the name, we need to ask ourselves what can actually go right at this company? The answer there is really a sale of Buy Buy Baby, which is really the crown jewel of this company – and arguably worth $1bn. There’s no reason why it can’t be monetized, though we need to keep in mind that this company has $1.4bn in debt and another $1.9bn in lease liabilities. On a pop/rip/squeeze on BBBY on a Buy Buy Baby sale, we’d likely get heavy again in our BBBY short – as the core business is ultimately worth zero, with no logical strategic buyers.
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