On Holding (ONON) | Going short ONON – for more than a TRADE this time. We went short this name earlier this year at $23, largely as a hedge to our Long DECK call, and covered last month at $17 – simply because brand heat is was too strong to be short. But since then, the stock is up 23%, and more importantly, we incrementally think that the brand is growing too fast and is becoming overdistributed. DECK definitely 'gets' what I call ‘product stratification’, which is tiering the product by price point, channel, retailer, and consumer type. I (McGough) think ONON is falling very short in this area. It’s simply growing too fast, and the growth is too uncontrolled, and way too sloppy. The same product is showing up in too many similar retailers, and we think that will lead to price discounting in Quad 4. This is a rookie management team, and its never lived through a brand cycle like this (like DECK has), and certainly has not managed the company through multiple Quad 4s. We’re also getting concerned about the European consumer as it relates to discretionary goods, and Europe represents 30% of ONON’s top line. This stock trades at 57x earnings and 30x EBITDA, and if we’re right and growth hits a wall and takes profitability (via discounts) with it, multiple can get cut in half here on lower numbers. This stock could easily fall 50-70%. Timing here is key…as it might take more than a few quarters for this to play out. But we’ll be patient, and will move up our short list as our research call grows in conviction, or in the less likely scenario that price goes against us.
ADS-DE/ADDYY (Adidas) | Going short – in for a world of multi-year pain. We were long Adidas last year, but got off this long in February as we began to lose faith in managements strategy, particularly in China. The stock is down 35% since we got off the name vs -8% for the S&P. You could argue that we’re late to the party in going short the name given the stock’s underperformance. But last week the company’s ‘rock star’ CEO Kasper Rorsted was basically fired, staying on until 2023 while a replacement is found. Apparently the Board isn’t too thrilled with his execution either. The reality is that this company and brand is a lame duck until the CEO transition, then we’ll see leadership changes amongst the divisions, and a multi year strategy reset – none of which will come until mid 2024 at the earlier. Until then, Nike is going to simply annihilate Adidas, and it will lose share to the ‘new class’ of brands like HOKA, BIRD, and ONON as well as local Chinese brands like Li Ning, Anta, and xStep. Europe/Germany is in a world of hurt RIGHT NOW – and this can’t not come back to haunt Adidas (Europe ~40% of cash flow). The CEO transition is in the stock, but the years of uncertainty, share loss and downward earnings revisions are not. This name carries a 19x PE and 9x EBITDA multiple – both of which we’d argue can get cheaper by 20-25% on REAL (lower) numbers. In the footwear space, we like owning NKE, DECK, and BIRD against ONON, ADDYY and FL.
Target (TGT) | Going Short Tar-Jay. Something just is not right here at Target. The company has a massive inventory problem, as do its competitors. To its credit, TGT cut guidance twice in three weeks this summer to be more offensive in clearing excess product. In effect, it’s given back nearly all of the margins gains that it won during the pandemic. Bulls think the company kitchen-sinked the guide, threw in the towel on margins, and only good news on the margin from here. But we have two problems with this story. 1) It gained $30BILLION in sales during the pandemic – off a base of $78bn. That is simply massive. To its credit, the company was in the right place at the right time with the right strategy that aligned with how the customer wanted to shop. But these massive and compressed market share gains are unlike anything we’re ever seen for such a ‘stable’ big box retailer in decades. That leads us to problem #2. The Street is following TGT’s guide on margins for the next quarter – sort of. But the ramp in EPS growth and positive rate of change is very difficult to stomach. EPS was down 89% in the latest quarter. Street has that sequentially improving to -29% in 3Q, and then +4% in 4! To cap it off, the consensus is looking for 47% growth next year. 47%!!! To be abundantly clear, there is no reason why the top line can't be down next year. We’ll be going through 4 Quad4s – and I don’t think Cornell (CEO) gets this -- will be surprised to see him still there in a year. And as we stated in our industry deck when we went through industry EBIT growth expectations for 2023 as being way too high – both sales and margins – TGT is sitting right in the bulls eye of competitive pressure from the 80-90% of retailers that will be aggressively clearing product. Bottom line is that going from ~$8 this year to $12 next year in EPS is a herculean feat that we don’t think TGT will pull off. Not hugely expensive at 10x EBITDA, but what’s the real EBITDA rate? That’s the part of the equation that the market has wrong. No reason why TGT can’t revisit $100-$120 vs current $160 – a big return on a beta-adjusted basis for a big cap ‘stable’ name like target. May be good to pair against Biolsi’s bullish call on WMT.
Guess? (GES) | Punting from Long Bias list. We took GES off our Best Ideas list headed into this quarter, given the high likelihood of a miss and guide down – simply due to the toxic environment as opposed to mis-steps by management. Last week we got just that. Slight $0.02 miss ($0.39 vs $0.41), but a scant $0.08 ps guide down for 3Q and only a nickel for 4Q. Either this management team is crushing it relative to the competition, of its did not take down guidance enough. We like how the SKU count is being rationalized by 40%, mitigating GM pressure, but this company depends HEAVILY on the European consumer, with upwards of 60% to 65% of cash flow coming from Europe. And as noted, we’ve grown increasingly concerned about European discretionary consumer spending in just the last two weeks. Bottom line, GES should have guided down more – even if it thinks it could beat guidance. The stock is so cheap at 6x EPS and EBITDA, but cheap is irrelevant (and always can get cheaper) when numbers are in question and we’re looking at a series of Global Quad 4s. We’ll look to get involved again here at a lower price on lower expectations.
Best Buy (BBY) | Bearish into Tuesday’s Print. Two weeks ago we moved BBY higher on Best Idea Short list. We moved this lower on the short side a couple months back with the stock around $70 and the market becoming aware of the appliance/durables inventory problem from TGT’s signal. However, now BBY is back up, and we think industry trends have gotten worse. BBY is trading at 12x earnings again after it guide down but we think there is further earnings risk to come. The company guided margins to just a little below 2019 level while we are heading into a US recession. Margins could easily be revised down another 100bps+ into next year, and the stock will start to look very expensive in the $75-80 trading range. Demand is slowing and inventories are high. Then the street is of course modeling sales and margin expansion in 2023, yet we could see a multi-year time period of reduced consumption in many of BBY’s core categories. We see earnings downside risk to ~$5.50 and a stock closer to $55 to $60. The trouble with a company with razor thin 4% EBITD margins, is that a 200bp hit – very possible from here – would literally cut earnings in half, and the stock with it.
Chewy (CHWY) | Less bullish on this Tuesday’s print. The stock has more than doubled from the bottom a few months ago. It’s now entering the lower end of the 12 month value range we outlined in the note after 1Q earnings $50 to $75 (CHWY | Strong 1Q In Tough Ecom Market). In early 2022, we were getting more bullish on ecommerce given we thought we’d see the space in aggregate go from slowing to accelerating around springtime. Now ecommerce names have rallied fast after AMZN delivered a 2Q acceleration and guided to another acceleration in 3Q. As macro continues to weaken we are becoming increasingly concerned about a weakening rate of change around 4Q, especially for players other than Amazon who looks to be getting more aggressive in driving share gains. This is staying on the BI long list, it could easily head to $70 on a good quarter and business acceleration, especially with still elevated 25% short interest. But the risk/reward after the rally suggests taking it down relative to other consumer longs.
PLBY Group (PLBY) | Activist campaign brewing to oust CEO, as stock is trading at at 30-35% discount to liquidation value. Never seen such a value dislocation before, and NEVER is a long time for a vet who's been doing this for 29 years. Not taking sides -- yet. But having a one on one meeting w CEO in LA in two weeks and will get some critical questions answered. We'll do a PLBY Q&A either in The Arena or Live Video after my visit.
