Retail Position Monitor Update | CPRI, IPAR, WOOF, ORLY, AAP, MNRO, DG, DOL-TSE, GRPN, RVLV

Capri (CPRI) | Sticking with this as our #1 Best Idea Long after Analyst Day. The company said everything I wanted to hear – including taking up its long term revenue target, and blessing the full year estimate despite increased FX headwinds. The company maintained guidance of $6.85, but we think that that this name comes in well above $7. Great opportunity to look management dead in the eyeballs and ask the right questions about how its managing its portfolio. Michael Kors is trending above plan, Jimmy Choo appears to be knocking the cover off the ball, and Versace is on track to more than double sales and triple EBITDA if our model is right. The company is more interested in working with the assets it has than buying new ones, and thinks that the best use of capital is buying back stock at current levels – and we agree 100%. At close to 5x our earnings estimate, we think this name has massive downside support, and meaningful upside as Versace and Choo deliver on their growth goals (and Kors surprises on the upside). We think that this name has upside over a TRADE, TREND and TAIL duration (3-bagger over TAIL).

Inter Parfums (IPAR) | Elevating on Short Bias list. Strong sales results last week from IPAR last week – golf clap there. Beauty is definitely a hot category, but one we think is decelerating and is setting up for lots of shorts in the space. As noted two weeks ago, 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 25x 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 $80, or 40%+ downside. We started off with this name at the bottom of our Short Bias list, but as the negative growth and margin inflection draws near, it’s going up on our list.

Revolve (RVLV) | Best Idea Short – Press It. This has been a great short for us, and based on what we know today, we’d press it. It was reported over the weekend that Asos – one of RVLV’s online fashion competitors based in Europe – is delaying fall orders due to weak demand – and excess inventory. That’s spot-on with our call to remain short virtually every apparel name except TJX and to a lesser degree, GES. We think RVLV is suffering the same problems as Asos, is still battling with a very high 50-60% return rate, and most of all, still carries a multiple to it. Stock trades at 20x earnings and 12x EBITDA.  We went short this name at $66, and it’s now sitting at $29. And based on current trends, there’s no reason why this stock shouldn’t be in the teens.

PetCo Health and Wellness (WOOF) | Removing from Best Idea Long list. To be clear, we’re huge fans of the long-term call here, most notably the rollout of Vet clinics into 900 of PetCo’s stores to make it a hub for all things pet-related. But data suggests that traffic trends have declined materially in recent weeks, and the consensus estimates have risen meaningfully since last quarter. At a minimum, we think upside is limited, and we can’t ignore the potential for a miss – especially in this choppy consumer environment at a point when CHWY trends are inflecting to the positive side on the margin. Also, in this labor market, we’ve got to think that WOOF is having a tough time hiring vet staff to man the clinics, which could put pressure on SG&A. This stock is as cheap as it’s ever been but in this rare instance ‘ever’ is a really short time as it’s only been public for 18 months. Trading at 15x earnings and 10x EBITDA seems perfectly fair to us, but the name is going through ‘valuation discovery’ during Quad 4 while trends are slowing, and there’s no reason why this name can’t see 10-12x earnings on a near-term cut, which could push this stock closer to $10. Again, we still like it a lot long term, so it’s staying on our long-bias list, but we’ll look to make it a Best Idea again on a reset at a lower price.

O’Reilly and Advance Auto Parts (ORLY/AAP) | Removed from Long Bias list – Near Term Trends Bearish.  Our view of the TRADE and TREND durations in Auto Parts retail is getting incrementally bearish.  Long term demand drivers look intact, but near term we’re see deterioration in miles driven trends, elevated gas prices squeezing the car allocation of the consumer wallet, while general discretionary spending power of the consumer continues to be under pressure.  That’s translating to slowing online interest on google and slowing visitation trends per Placer.  The risk of the directional trend of the business does not appear to be in consensus numbers.  Those consensus expectations for 2022 have marched up over 10% for each name in the last year, and imply rate of change improvement in the middle part of this year.  If these names start to see slowing results and earnings revision pressure, we suspect the trade in the coming months will be to sell the Auto Parts names that have outperformed, and swap into the beaten up names within other areas of consumer with trough multiples and EPS estimates already revised much lower.  Whereas we preferred the AAP ‘beta’ on the industry uptrend of last year, we trust ORLY to execute better in this slowing environment, still both have too much risk on 2Q results and 3Q guidance to remain on our long list.  We’ll revisit on lowered expectations and when data is signaling more bullishly.

Monro, Inc. (MNRO) | Adding to Short Bias list.  MRNO is going on our short list. The near term industry headwinds will be an issue for MNRO like everyone else, while MNRO has the problem of being a share donor due to years of underinvestment and mismanagement when it was the ‘rollup darling’ of the space about 5 years back.  The only bullish point is that it has relatively low expectations with the street building in a reasonably bearish view after the company pulled official guidance last quarter.  But this company was overearning into the pandemic (it was a top performing short call of ours initiated in May 2020), and it’s likely to continue to see earnings pressure on slowing business trends.  Yet the market is comfortable putting a 28x PE and 13.3x EBITDA multiple on MNRO.  As we continue to dive deeper on this one, it’s got a good chance of becoming a Best Idea Short.  There is an activist making a case to change the voting structure and trying to sell the company (strategic review), but we don’t think a sale is a likely outcome with business trends weakening and the stock at elevated multiples.

Groupon (GRPN) | Removing From Long Bias list.  The call here was around GRPN’s SumUp stake providing a support level while new management (CEO from Zappos) and activist pressure could mean a turnaround in the core business which was implied to be trading at a LSD EBITDA multiple.  The problem is that now the market has completely revalued payments businesses like SumUp to a fraction of the prior levels. The SumUp stake was disclosed to be about half the size of what our initial analysis suggested.  The activist has settled with the company for board representation, which has halted its buying of the stock, pressuring the bid near term.  Business trends have deteriorated while we’ve heard nothing from management that gives us confidence in a business turnaround, especially as digital marketing looks to be entering its own recession ahead of a possible actual US recession.  EBITDA for the core could go negative, and we’re not going to sit around waiting to see what the activists might do while this market continues to pressure small cap consumer ‘broken growth’ names like GRPN. This stock is cheap as hell, but there’s no reason why it can’t get cut in half here. Better places to fish… 

Dollar General and Dollarama (GD, DOL-TSE) | Punting both from Long Bias list. These have been GREAT Quad 4 stocks since we added them in January, along with DLTR. DG ripping 32% since May in a +2% tape, with DOL-TSE up a similar magnitude for the year-to-date. Could they continue to Outperform as Quad 4 rages on? Yes. No doubt. But at these valuations (near cycle peaks for both) we need the models to cooperate, and we simply can’t get to the earnings upside we need to justify staying long. In fact, with the pressures we’re seeing on the low-end consumer, if anything we think that earnings are at risk in the back half of the year. Not where we want to be. If you want Quad 4 ‘staple-ish’ exposure, we’d recommend taking a look at Biolsi and Penney’s BJ Long call.  

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