Retail Position Monitor Update | CPRI, BBWI, NKE, GPS, REAL, ONON, DTC

Capri (CPRI) | Investor Day On Wednesday – Best Idea Long. CPRI is hosting a long-awaited investor day on Wed the 20^th. We expect the company to come out all guns blazing – to at a minimum positively preannounce the quarter, and likely disclose how much stock it has been buying in the $40s. People will be focused on acquisitions, but our sense is that the company will say that it is much more focused in buying its own stock here than someone else’s. We’ll get a sense as to the depth of management, important given the moving pieces this year. But ultimately we think that people will walk away with the ammo to model tripling Versace sales over a ‘super TIAL duration (4- 5years) with EBIT margins 3x where they are today. That takes EBITDA contribution from ~$200mm last year to over $900mm over a multi year time period. Notable given this is such a higher margin, growth and multiple asset than anything else in the CPRI portfolio. All of our checks on the brands are coming back solid, and we think that the company will come in well ahead of the guide for this year and next. We think this name has momentum over a TRADE, TREND and TAIL, and it remains in the #1 slot on our Best Idea Long list.

Nike (NKE) | Moving Higher on Best Idea Long List. Taking Nike a notch higher on our Best Idea Long list. The reality is that after going through our FY23 (May) model in detail, the company set itself up for big upside in the August quarter. China was clearly a problem in the latest quarter, but Nike aggressively cleared out inventory which we think will lead to both a growth and GM acceleration in its second largest country. We’re coming in at $1.08 vs the Street at $0.95, with 10% higher numbers for the year, and 20% higher numbers over a TAIL duration. We think Nike’s accelerated DTC strategy will push its EBIT margins to 20% (from 14% last year) which is no way in the stock at current levels. At that point, with 60% of its business Direct to Consumer and a 20% margin and 40% ROIC, we think Nike will deserve a luxury-esque multiple on $7.50 in EPS, which is roughly double where the stock is today. Are there other names that we think get you paid bigger and faster? Yes. But Nike’s blow up risk is extremely low from where we see it. An extremely attractive risk adjusted return. The one knock we have on Nike is that we think it made a strategic gaffe, and pulled back too much on wholesale distribution, opening the door for upstart brands to become serious competition 3-5 years down the road. Shouldn’t get in the way of our model or our target. But something to watch.

On Running (ONON) | Punting from Short Bias. This name is ridiculously expensive – trading at 60x EPS and 25x EBITDA. We’ve had it on our short bias list since March, and the stock is down 22% since then. So not a bad performer. But all we’ve got on this short is valuation, and that makes it a lousy short. This brand’s momentum is simply stunning. Consumer adoption is accelerating, traffic is improving, wholesale is absolutely ripping, and management is doing a fantastic job executing on the plan in both footwear and apparel… This company is going to grow into its multiple in 12-18 months time, and may even look cheaper at a higher price. At $17, ONON is a flat-out dangerous short.

Gap, Inc (GPS) | Dropping from Long Bias. It’s tough to like much about GPS, but we added it to the bottom of our long bias list bc literally any way we do the math, we get to 100% of the equity value being driven by just 10% of revenue (Athleta). Not sure I’ve ever seen that in my career. This is a lay up for an activist if I’ve ever seen one. If the Fisher family (which owns about 40% of the shares outstanding) would only get in gear and monetize the Athleta asset, this stock could easily double. But apparently the Fishers don’t like making money. They just like hiring and firing management teams who have the impossible job of trying to fix Gap, Old Navy and Banana.  That might be the hardest job in all of retail. Maybe the new CEO splits the company up…stranger things have happened. But we’re not going to sit here and watch a stock drift lower (it could see $5 no problem) with no serious catalyst to unlock value.

RealReal (REAL) | Taking Higher on Long Bias List. The fact that this stock is sitting here at $2.44 and a $230 market cap is simply pathetic. This company has the best luxury authentication and luxury second hand retail model in the business. We take the company’s recent push to AI to scale the model with a grain of salt. This is a human-capital-intensive business. The company is pushing $2bn in GMV, and is ripe to be bought out by LVMV, Kering, or even EBAY (which has struggled at the high end). There’s no shortage of consumer discretionary stocks getting Quad 4’d and are trading at $2-$5 – which is considered ‘no man’s land’ for most self respecting institutions. But no reason that strategics wouldn’t look at this asset 93% below the offering price. Not sure if we’d every make this a best idea, but it has the greatest likelihood of being taken out of any company in consumer discretionary/retail.

Bath & Body Works (BBWI) | Taking to the top of the Long Bias list.  This one is close to being a Best Idea, we’re waiting on one more quarter given the risk of a miss and or downward revision, and/or better visibility to a reacceleration in the business.  The stock has seen two sell side downgrades in last couple weeks. The market seems to think the company will see sales per store below 2019 levels and margins toward something like the mid-teens vs trailing ~25%.  The stock is behaving (ie trading) more like VSCO, a mall apparel retailer with much more volatile margin and comp characteristics than the Bath and Body Works business has demonstrated.  Perhaps the multiple is being hindered by the “machines” looking at historical trends when VSCO used to be a part of this trading entity (it changed tickers from the old LB).  There is also likely concern around raw materials inflation pressure given rising oil prices, though we suspect raw materials to be a very small portion of COGS, and the company has some levers to manage around the inflation, though we’re are still modeling YY margin pressure.  If we say we are heading into a bad recession with near term cost pressures and get super bearish on our model we get to EBITDA around $1.3bn and EPS around $2.20. This would put a bear case leverage ratio at about 3.3x.  We think the forward growth on this name from that lowered level still deserves and EBITDA multiple of at least 8x to 10x and low double digit P/E, that puts around downside around $23 to $25 vs current $27.50.  Our base model has $4.10 in NTM EPS, we think a fair value today in Macro Quad4 is around $35 to $45.  TAIL earnings power here is $5.50 to $6, and with the growth opportunity, strong cash generation, and buyback potential of this stock it deserves at least a low double digit PE multiple, meaning in we’re looking at a $60 to $70 stock in 12 to 24 months.

Solo Brands (DTC) | Covering short after a 75% gain. We went short Solo Brands on 1/17 at $16 based on our view that the portfolio was losing momentum, and that the core businesses (Solo Stoves, Kayaks, and Shorts) had absolutely nothing to do with one another. It was simply a private equity piece-meal deal to see overearning assets at a time when the pandemic consumption trends and the market (Quad 2) presented an opportunity for PE firms to sell assets that would otherwise have been private forever. Well, today DTC is selling for sub-$5, 3x earnings (6x EBITDA given its leverage), and we’re actually starting to see incremental strength in the core Solo Stove business vs this time last year. We’re far from ready to make a long call on this name, as 3-4x EBITDA is in no way out of the question, which leaves it close to no equity value. But we suspect the next move in the stock is higher given the business acceleration, which does not appear to be in expectations.  

Links To Best Idea Long/Short Thesis: