Macro Quad4 Continues. Keith McCullough and the Hedgeye Macro team presented Q4 Macro Themes on Thursday. The Hedgeye Macro outlook remains #Quad4, with Theme number one on this weeks 4Q Macro Themes Call being Global #Quad4 Recession. We’ve been clear about our outlook for retail being bearish at least until around early Spring of 2023. There were a few specific callouts from the Themes call that we think are noteworthy for retail and consumer investors. One is the wealth effect, and how our Macro team has laid out the likely lagged consumption impact of the prior rise in asset prices and recent asset price pressure. By their math 2Q was the peak of that consumption tailwind, now the rate of change rapidly slows and ultimately inflects to a headwind. We think that is bearish for certain parts of higher end consumption that have held up well to date. Another aspect is inflation, which mathematically should slow, though there is still pressure around food and shelter. The fed path is unlikely to pivot anytime soon, but some key drivers are starting to roll. Used auto prices are falling as their fastest pace ever, meaning the rate of disinflation will pick up rapidly. Shipping is also plunging, particularly ocean freight. We covered the impact of retail here in our note last week: Retail | Freight Is Becoming A Consensus Bull Case. Fade It. Short Retail. The last callout is housing, and the alarming changes of the last few months. Mortgage rates are rising at their fastest pace ever, and the impact is happening in real time. The FHFA M/M SAAR change has seen a sequential change over 3 months that took about a year and a half in the 07/08 housing collapse. As Housing/Macro Analyst phrase it its alarming “how quickly housing is getting steamrolled” by fed policy. It’s hard to predict what the impact across the housing related retail space over the coming 12 months, but it’s most likely bearish. We plan to host a ‘Housing Ecosystem’ Black Book on Friday Oct 14th. More details to come.
Acushnet (GOLF) | Moving To a Best Idea Short. We think we’re at the beginning or the end for the boom in golf demand. Macro matters in this category, particularly the wealth effect, which per our Macro team’s 4Q Themes Call this past week is now rolling over from a rate of change perspective. In the last recession, golf equipment sales fell about 22%. Yet consensus expectations don’t even have a down sales quarter in expectations for GOLF. Currency risk alone could drive a sales miss here with an FX headwind on the topline of over 7% by our math in 4Q22, and there’s no sign of that directional currency pressure getting better any time soon. The most bullish part of the business is balls, as we think rounds can stay elevated as core golfers leverage work from home to hit the golf course more often. The perceived boom in golf was driven much more by core players playing more, as participation in 2020 and 2021 averaged just 1.5% growth, while rounds averaged 9.5% growth. Rounds in 2022 have fallen slightly, and we’d expect some gradual reversion, but potentially settling above 2019 levels. As we look at clubs, footwear/apparel, and gear we think the consumption risk is high. Elevated sales over the last 3 to 4 years means higher replacement, with some pricing increases. Like any other durable goods, golf clubs can go several years before needing to be replaced, and there is no major innovation on the horizon to drive an accelerated replacement cycle. GOLF has a new TSR line of drivers/woods that just launched, but it generally looks like modest tweaks from the prior TSi lines. Also common after a few years of elevated sales into a weakening economy is a build of quality used inventory of clubs just a year or two old, particularly drivers which then presents pricing pressure for on the marginal transaction. The longer term golf cycle is another risk, as we have see a brief period of participation growth over the last few years in what had been a secular decline in US participation. We think we are likely to return to participation declines, but we don’t need to make that call to be bearish here today. Expectations look too high for GOLF over TREND and TAIL durations. We see EBITDA falling to $265mm in 2023, while the street is looking for growth in EBITDA to $358mm. Our model still has 2023 sales 22% ahead of 2019 levels, maybe that’s too bullish. A fair multiple in our view is around 9x, or $25 to $30 per share, putting downside in the stock of 30% to 45%. In a bearish scenario we think EBITDA could head closer to $200mm and the stock cut in half or worse.
Big Change in Athletic Positioning
On Friday, following Nike’s massive inventory bloat, we added several athletic names to our position Monitor – short side. Namely, UAA, SKX, PMMAF (Puma), which is in addition to our shorts on ADDYY (which we are moving materially higher on our list today), DKS, HIBB, FL, and BGFV. See our note for full details.
NKE | Short The Athletic Ecosystem: Inventory bloat = Athletic nuke. Nike is controlling the show, and no retailer or brand is safe. Short everything else now, buy Nike later.
- Adidas (ADDYY) | Moving materially higher on Best Idea Short list. Adidas was already in trouble – as its momentum in the US is slowing, its business is crashing in China, and the company has a ‘lame duck’ CEO for another nine months, and we’re likely waiting for another 2-3 years until it begins to develop and execute a new strategy to get back on the rails globally. During that time, we think Nike is salivating over gobbling up Adidas’ market share in virtually every region of the world. On top of that, the kicker is this Nike inventory problem – more than half of which is in apparel (where Adidas skews as it relates to product line) which will likely result in an even deeper 4Q miss than we had previously anticipated. This company is on track to earn close to $3 this year (Street at $3.47), and the Street is looking for EPS power up to $5.40 by FY24. We think we’re looking at a $3 earnings annuity over the next 3-years, which we don’t think is worth more than 12x earnings, which is good for 35% downside from current levels.
- UnderArmour (UAA) | Adding to Short Bias List. I hate the fact that we’re adding UAA to the short bias list with the stock on its lows ($7), but the reality is that this brand has zero (if not negative) heat in the marketplace right now, and a guide down from here is highly likely as Nike steps on the brands toes – hard. The Street is looking for a ‘new’ normal in TAIL EPS of $0.77 per share, but we’re looking at closer to $0.30-$0.40 – which is good for a $4. Stock. Is this a raging short here, but over the next six-nine months, it’s likely headed lower still. Also mind you that the company just fired its CEO, which cut WAY too much out of the operating infrastructure of the company. He didn’t get it. This is a space where you have to spend money to make money…R&D, Marketing, Digital – all of which requires a lot of headcount. I can’t believe I’m saying this, but the best move at this point might be for Kevin Plank to step back as CEO. The stock probably trades down on that announcement, but he’ll spend (even though this $1bn lifetime endorsement with Steph Curry is flat out ridonkulous – the guy is an amazing human and hoops player, but he has no Street cred and doesn’t sell product). Maybe we’d take a flier on UAA at $4 with a solid management change, and we think during the next nine months we’ll likely get that chance.
- Skechers (SKX) | Adding to Short Bias list. This is one of the companies that was gaining share as Nike pulled out of wholesale distribution. Nike gave it a layup. But now that narrative changed dramatically. Nike isn’t muscling back into ‘broken wholesale doors’, but SKX is gaining space at marginal retailers. It has a halfway decent business model – being a ‘fast second’ in knocking off whatever product is hot and selling, and getting identical looking product on the shelves in short order. Lawsuit prone? Yes. But it’s good at what it does. To be clear, I think this is one of the least trustworthy management teams in retail. They’re great at selling stock when spouting reasons for shareholders to buy, and this name is good for a blowup every two year. With the level of discounting we’re bee seeing in SKX’s core space, the price gap between ‘the real thing’ ‘and what SKX has to offer will compress, hurting its competitive moat. We think that the Street looking for 31% earnings growth in 4Q is way too high. This company can easily have a down quarter, and then put up closer to $2.50 in 2023 (The Street is at $3.43). Stock is not expensive at 7x EBITDA, but numbers are too high – so the real EBITDA multiple is closer to 9x. We’re not comfortable paying that for this name. We think there’s downside here on an earnings miss/guide down closer to the low $20s. Stock now at $31.
- Academy Sports & Outdoor (ASO) | Academy Added to Short Bias List. We took Academy off our long list in mid August in the high $40s after being long for about a year and a half. The stock certainly looks cheap at 5.5x EPS, but there is definitely demand and margin risk coming for this space, and could be coming relatively soon. Nike isn’t huge at ASO, just 11% of purchases, maybe mid teens of sales. But the pricing pressure from the inventory problems in athletic will hurt margins some here, ASO can be very promotion in its marketing emails. Add on the fact that perhaps part of why ASO earnings have held up well is that it’s store base in concentrated in key US oil markets. With oil collapsing the core ASO consumer will likely feel a little less spend happy as a few months ago. 2023 EPS estimates are probably about 15% too high, it’s hard to say what the right multiple is, but as the earnings are being revised lower over the next 5 months the stock likely marches lower.
