Kohl’s (KSS) | Moving down to the dead last spot on our Short Bias List. This short has been a big win for us, as we pressed it when the activists were circling for a sale in the $60s claiming $8+ in earnings power. All along we asserted that the REAL earnings power of KSS is about $4. Lo and behold, the company this past week guided to $2.80-$3.20 – which excludes the impact of the $500mm ASR on the share count. We’re seeing tweaks in earnings guidance by most retailers, but none have guided as aggressively as KSS. This might be the only guide that we actually believe, and yes, we still think that TAIL earnings power is about $4ps. Gotta admit, I (McGough) sat back and actually wondered if this was a long on the sell off this week – especially given that the Street came down to $3.12 for this year – doable – and then $3.65 next year – below what we think the TAIL earnings power is. But the reality is that we’re got several more Quad4s ahead of us, the competitive environment getting much worse, and Kohl’s stores are being highly disrupted as ALL of them are being converted to Kohl’s/Sephora locations. For the back half of this year, KSS likely trades with the apparel group, which we think is lower. But to be clear, we can envision going long this stock in the $20s as we emerge from Quad 4. Anyone that’s known me for a while can attest to the fact that me even hinting that KSS is a pseudo long is a MAJOR statement.
Foot Locker (FL) | Adding back short side on the Dillon squeeze. We saw a major (20%) squeeze and four Old Wall upgrades due to Mary Dillon being named as the CEO of FL. I’ll take the other side of that one. The reality is that, yes, Mary Dillon is a first rate CEO, as evidenced when she took ULTA from its infancy to over 1,350 stores today. But I firmly believe that Dick Johnson, the outgoing CEO of FL, actually did the best job that anyone could have done given the hand he was dealt. It was a lousy hand. But he played it well. As CEO, Dillon will be dealt one lousy hand after another. At ULTA she was all about exploding the store base and creating ULTA as a beauty destination. No vendor at ULTA accounted for more than ~5% of sales, as the consumer went there for the experience and to stock up on multiple beauty items. She was smart enough to leave last year when the store base tapped out and the fundamental competitive dynamics of the business began to change. She saw what was coming, and wanted no part of it (nor do we – ULTA is a Best Idea Short). Now at FL she has to contend with one vendor (Nike) that accounts for 50% of volume, and is likely shrinking from here. She can substitute with other brands, but the reality is that the FL customer wants Nike. Period. In the opening comments of Friday’s call, Johnson note that comps were down 10.3%, but that ‘non Nike brands’ were up high single digits – and yet total comps were still horrible. There is literally nothing that even the best CEO on the planet can do here to fix this business. Even FL’s minority ownership in GOAT, which was once worth about ~$8 per share, is softening on the margin, and probably worth closer to $5 today. Shy of a transformational deal where FL buys GOAT outright, and StockX (or Stadium Goods from Farfetch) we don’t see how Dillon can come up with a plan that will be believable that will lead to long term shareholder creation. Could the stock trade higher when people hear her first long-term strategic plan? Yes, but then we’re likely to up this on our short list – potentially to a Best Idea Short. Foot Locker is not a terminal business like BBBY, but there is no path to growth under nearly any circumstance. Sorry Mary, but you picked the wrong job. We’ll fade the Dillon hype.
Destination XL Group (DXLG) | Adding long side. Print on Thursday. We’ve been increasingly interested in this model over the past year. We highlighted it in our ‘Bone, Bagger or Bust’ deck as a long-term survivor – i.e. a name that’s likely to be a multi-bagger as Quad4 ends. The company reports earnings this Thursday. Let’s be clear, this is Quad4 and apparel companies are dropping like flies in Quad4. That said, on a relative basis, we think the numbers will prove to be better than the group, and if there is a guide-down it will be small. Our playbook here would be to buy SOME (position sizing matters) on the event – either on a small sell-off with guidance – or on a small pop bc its performing relatively better than the group. Over a TAIL duration, this company is definitely a winner. Here’s what we said in our recent ‘Bone Bagger or Bust’ deck…
Ulta Beauty (ULTA) | Short Before and After Thursday’s Print. This is one of our highest conviction multi-year shorts. We’ve outlined the existential treats to the TREND and TAIL narrative. We’re expecting an in-line quarter this Thursday, but keep in mind that from a rate of change perspective, that is extremely bearish. This company has smoked consensus by an average of 50% each of the past 6 quarters, and we think that those beats are coming to an end. The beauty category is still healthy relative to other parts of retail, which is why we think that this name is a viewed as a ‘safe’ hiding spot for the long-only community and Hedge Funds alike. But due to a slowdown in the category, increased competition from Amazon, brands selling direct, a cannibalistic partnership with Target, and most importantly, Kohl’s going ‘all-in’ to basically convert itself to becoming a beauty retailer by converting ALL of its stores to be co-branded Kohl’s Sephora banners, the comp line at ULTA will come under considerable pressure. Tack on the fact that Gross Margins are 300-400bp above pre-pandemic levels, SG&A cuts were too much over the past 3 years (and need to come back) we get to FLAT EBIT over the next three years, with the only EPS coming from repo as the company buys back stock at the top. That’s a bad look. Importantly, it’s not worth 13x EBITDA – especially with only 3% of the float short and a Consensus ‘Buy Rating’ on Old Wall. If we’re right on the model, we think this stock gets revalued to a high single digit multiple, which is tasty downside to $225-$250 with the stock currently over $400. Best Idea Short.
Bed Bath & Beyond (BBBY) | Press the short. We said to press this name with impunity as the ‘Ryan Cohen crowd’ pushed this name near $20 a week ago. Since then Cohen sold all his stock (12% of shares outstanding), and the company subsequently announced that it has hired a bankruptcy/restructuring specialist to help save the company. Cohen was selling stock while that press release was literally being drafted. Not sure how that’s legal. Then after the close on Friday, Bloomberg reported that certain vendors have stopped shipments to BBBY due to concerns over trade credit (i.e. getting paid). Once vendors stop shipping to a retailer, it is usually the beginning of the end. I’ve said it before and will say it again, this name is ultimately a Zero. It’s a zombie. Maybe the best play is to go heavy short side when the company announces a sale of buy buy Baby. But what does that tell you about the future of a company when it has to sell its crown jewel asset to continue to exist? It’s just kicking the can down the road. There’s no way out here. BBBY is ultimately going bust. ZERO. Best Idea Short.
PetCo Health and Wellness (WOOF) | Staying on the sidelines into Wednesday’s print. We took this name down to our Bench from a Best Idea Long last month. The reality is that WOOF is seeing the same traffic declines we saw throughout the rest of retail, and while trends have sequentially improved in recent weeks (see chart below) it’s still squarely negative. In addition, we think the company is being clipped higher labor costs and vet/tech availability as it builds out its vet clinics. We think a miss is more likely than not, and there’s a high probability of a guide down. Unlike other retailers, WOOF is still going through ‘valuation discovery' as it’s only been public for 18 months. It currently sits at 17x earnings, and 11x EBITDA – and while those levels are trough, there’s no reason it can't trade several points lower on a guide down. We like this name a lot over a TAIL duration, but we definitely want to de-risk this event before getting more bullish.
