RH Inc (RH) | Moving up to our #1 Slot on Best Idea Long list. After our meeting with RH management in San Fran last week, we walked out even more confident that a) this is the most ‘Macro Aware’ management team in retail and is one of the only ones managing and guiding the business around Quad4, and b) the TAIL upside is far bigger, better and more profitable than the consensus thinks with the stock at $256. Could the stock go lower from here? Of course, this is Macro Quad4, and our sense is that even though we think RH will beat the quarter, management will keep expectations grounded heading into FY23. How we’re doing the math, a trough multiple on trough earnings gets us to about a $180 stock or about $75 downside. Not pretty, though we think that management is in the market buying the stock TODAY, and the trends in the business have yet to roll. Though ‘yet’ is the operative word, and it’s planning/guiding for a slowdown. It’s got a $2.5bn warchest of cash, and we think it will use ALL of it to support the stock on Quad4 days over the next year. But again, we think that RH is planning for business to roll, unlike other names both in its space and across broader retail, that will be caught by surprise with big misses or guide-downs. Longer term, we think there’s better than $1,500 upside in the stock when RH hits our $60 EPS number (in years 3-5 with Street at $30). We think that Europe will be bigger than anyone expects, perhaps even the company (and that’s the biggest pushback we get on this name here – that ‘Europe will be a bust’). Ultimately, we want to allocate the number 1 slot on our idea list with the best upside/downside ratio, and even more importantly, with a management team that ‘gets it’ as it relates to the Global economic climate we’re living (and investing) in. Best name to own in retail over a TAIL duration. We’d definitely own some today, and would be buyers on red.
Capri Holdings (CPRI) | Previously occupied the #1 slot on our list, now at #2. This remains a high conviction call, with very defendable downside with the stock at $42. If there’s any negative change on the margin, it’s that FX risk has gotten worse since the company guided. But then again, so has the stock. We still think CPRI beats the quarter, and ultimately earns 20% more next year than the Street is modeling. The Kors brand remains stable, and we think that cash flow fuels outsized growth and margins in Versace and Jimmy Choo. Ultimately, over a 3-5 year time horizon, we have EBITDA at Versace/Choo going from ~$350mm to $1.15bn (see our sum of the parts model below), or roughly 50% of segment-level EBITDA. As this shift happens, we think the company not only over-delivers on earnings, but we get a multiple at least a third of the way closer to the major European luxury brands. We don’t think an 11x EBITDA multiple is heroic by any means on our numbers once we get that shift in profit sourcing, which gets you to a stock over $200 over a TAIL duration. It’s at $42 today, and we think you have downside to $30 on an FX guide down in an ugly retail and Quad4 tape heading into Spring of 2023 – when we think we’re going to pivot hard in our bearish stance on retail. 
Tapestry (TPR) | Moving Higher on Long List. We just added this to our long list two weeks ago, but as we dig deeper into the research call, we’re gaining confidence in both the growth in the core Coach brand and the sustainability of earnings while the rest of retail misses. The reality is that 90% of the profits here are with the Coach brand. We’ve been skeptics for some time on this one because so much of the investment thesis rested on one singular mature brand (it also owns Kate Spade and Stuart Weitzman). But Coach has accomplished something that we see once a decade in retail – it succeeded in taking the average age of the target customer down by 10-20 years. To be clear, customers age with a brand, like we see with Ralph Lauren and Oxford Industries. Attracting Gen Z and Millennials without impairing the ‘cash cow’ older customer relationship is near impossible to do. And to Coach’s credit, it’s succeeded. The bottom line is that we think that the top line trajectory, AUR (price/mix) increase is sustainable for far longer than we have in the past. At less than 8x earnings it’s trading at a 20% discount to brands like RL that are trying the same strategy – and we think will fail. In addition, let’s keep in mind that the handbag/accessory is far more defendable than apparel in a downturn (and otherwise). Higher margin, more predictable unit demand, less discounting, and better price integrity. For those who have to have names in their book long side – even if net short – we think TPR is a good one. We still like CPRI far better, even though the Coach brand is probably a notch ahead of the Kors brand right now in consumer relevance. But CPRI offers massive sales and margin upside over a TAIL duration with Versace and Jimmy Choo – something TPR lacks.
We’ve been diving deep into the European Luxury names. Starting off with pair trade on Kering (Short) and LVMH (Long). Expect more luxury calls to come in the coming months…both sides.
Kering (KER-PAR/PPRUY ADR) – New Short Idea. The punchline on Kering is that we think the company is over-extending the core Gucci brand at precisely the wrong time --- when we’re in global Macro Quad4. The stock is admittedly super cheap – trading at just 13x the Street’s EPS and at 8x EBITDA. If numbers are doable, the stock is arguably a raging long. The problem is that we don’t think numbers are realistic – especially relative to LVMH. Kering has a fairly solid brand portfolio, with the fashion and leather goods names being at the forefront. It has Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen, and Brioni. There are also a handful of jewelry names: Boucheron, Pomellato, DoDo, and Qeelin, in addition to the entire Kering Eyewear division. Ultimately, the key to this group is Gucci, which accounts for approx. 55% of total revenues and 60-65% of EBITDA. Asia Pacific represents about 40% of sales, which we don’t like given China lockdowns. While Gucci had 31% growth YY in FY 2021, it was comping the prior year that was down 23%. In reality, FY 2021 was only 1% above 2019 revenue. In 2017 and 2018 Gucci hit peak growth rates of 42% and 33%, respectively, which was at peak popularity. Don’t get us wrong, we don’t think it’s a bad company, we just don’t think it can grow at the rates the Street is currently underwriting. To be clear, our concern is that Gucci is getting overly saturated in the market… we don’t need multiple Adidas collabs, and definitely not Adidas collabs at the same time as a North Face collab. Good for the other brands, but a bad look for Gucci. Not to mention that Gucci just opened a shop on Goodwill, which is outright perplexing. These brand collabs were once hot, but when you can go on the website and easily buy the items, they aren’t as limited or exclusive anymore. And that’s basically the whole point of them. Basically, Gucci has too much going on at once and throwing everything out there doesn’t maintain the allure of a luxury brand. Is the brand broken? Definitely not. But it's overextended, and management has to reign in supply when we’re heading into the eye of the Global Macro storm – and it’s doing the opposite. The biggest question is whether earnings are doable, and we think that underwriting €33 in EPS this year and near €40 over a TAIL duration will be tough to backstop. Not as much downside left in this name as we can find in some US-only retail stocks, but we think the bet is down from here, with a pair against LVMH long.
Moet Hennessey Louis Vuitton [LVMH] (MC-PAR/LVMUY ADR) | New Long Idea. Unlike with Kering, we’re seeing LVMH be extremely tight with its brands in Global Macro Quad4. Like KER, LVMH is at a trough multiple, but it’s earnings numbers are actually believable, if not beatable. Keep in mind that LVMH grew organically during the Great Recession. The company ‘does Macro’ and is a master at short selling its product during consumer slowdowns – and is squarely among the best brand managers and stewards of capital of any consumer brand anywhere in the world. A little about the company…LVMH is true luxury with a diversified portfolio ranging from fashion and leather goods brands to media companies to alcohol brands – all of which truly embody a luxury lifestyle. LVMH has 79 brands which are divided into 6 divisions: fashion and leather goods; perfume and cosmetics; wine and spirits; watches and jewelry; selective retailing; and other activities. Fashion and leather goods accounts for just under 50% of total revenues. The next largest portion of revenues comes from selective retailing, around 18% of revenue. Watches and jewelry, perfume and cosmetics, and wine and spirits are approx.. 14%, 10%, and 9% of total revenues respectively. Focusing on the fashion and leather goods division – its cash cow, accounting for about 65% of cash flow -- the brands include Louis Vuitton, Fendi, Christian Dior, Celine, Loro Piana, Marc Jacbos, and others. Aside from Chanel and Hermes, LV is probably the only luxury fashion and leather goods brand that has stayed consistently strong without depending on the trend cycle of being considered a “hot brand”. The brand portfolio is so vast that something (or somethings) will be “in” all while having the strong, consistent LV brand as well. It’s all luxury but a lot of it is such high luxury that it’s debatable if that category even cracks. Aside from that, the key categories that sell here are more defendable – i.e. not totally focused on apparel. Looking out, there is ample opportunity for growth here. The brands themselves have space to grow and the brand portfolio can growth through future acquisitions. But most of all, we care about organic growth, and think that LVMH’s diversified portfolio will deliver. We’re not modeling big upside to numbers given our concerns around the Global Quad4 environment, but history shows that if you can get LVMH at a high teens multiple (which is where it is on our numbers today), you buy it. To be clear, we think there’s far better upside with other names in global retail. But relative to KER, we like the pair trade. This is a definite Best Idea Long candidate if the stock tests new cycle low multiples – which, mind you, would mean an absolute disaster for the broader market. For people looking for names to do the work on today in order to own as we come out of Quad4, we think that LVMH is an excellent place to start.
O’Reilly Automotive (ORLY) | Punting from Short list. Getting heavier on Advance Auto Parts (AAP) Short. We had ORLY as a tactical short due to near-term headwinds in the space (one of which was high gas prices – and that has abated to a degree), but also the trade down effect from ‘better’ to ‘good’ (lower price points) on discretionary items in the company’s DIY business. Looking at store visits, it’s abundantly clear to us that ORLY is not only extremely stable, but is taking share from Advance Auto Parts (AAP), which we don’t think is out of the woods on downward earnings revisions yet. We want to own both names at a price, especially given that we’re just entering a sweet spot of the Car Parc (age of vehicles on the road). But we think we’ve got time here before going long. For now, AAP short is our sole horse in the race between AZO, AAP and ORLY. We continue to favor the services names – in particular VVV and DRVN – both Best Idea Longs.
Aritzia (ATZ-CA) | New Long Idea. This is an ‘under the radar stock’ for most retail investors because it’s Canadian. But the company offers an exceptionally well-merchandised and high-quality assortment to Millennials and Gen Z (offering varies from a $20 tee shirt to a $400 coat.) The company has only 100 stores in North America, split evenly between Canada and the US. The customer at Aritzia is fiercely loyal, as the company sticks to its sweet spot and is consistently on trend with higher-end apparel for its core customer. The key here is that this company can easily get to 400-500 stores – and is likely to get there. We can count true unit growth stories in retail on one hand – and this is one of the best. While we’re skittish about adding an apparel stock long-side when we’re super bearish on the category, we think that estimates are realistic for next year (other apparel retailers are too high by 40-50%), and importantly, we think it’s more likely than not that the company executes a dual-listing sometime over the next year, making it more accessible/recognizable to US investors. We think that estimates for Feb 25 of C$2.17 are too low by 25%. We think 30x on a C$2.75 EPS number is a reality over 3-years, which gets to a low C$80s stock vs its current C$47. We’ll look to get heavier in the name in a promotional 4Q when the group will likely trade down materially – even though we think ATZ numbers are in check.
Boot Barn (BOOT) | New Long Idea. We were originally short BOOT at $109 in January of this year, and covered too early (at $92 in April when we got the sense that P&L momentum remained strong). But the stock is currently sitting at $58, and less than 8x our earnings estimate for next year. Though not the same unit growth potential as ATZ, BOOT has only 320 stores, and can also build to 400-500. Importantly, the trends this fall heavily favor BOOT’s core…which is Western Themed apparel – in particular, cowboy boots. Note that these are almost always multi-year trends – they last longer than most people think. That’s arguably in the multiple…and to be clear, we HATE investing in fashion trends. But the unique thing about BOOT is that its inventory is far more long-lived than the average retailer. Half of what the company sells is cowboy boots, which can be held in inventory for years if need be – unlike a name like Abercrombie that has a 4 week window to sell its product, BOOT has a massive time period to sell – and therefore will not promote its product. We also like the shift towards private label brands in its core apparel offering, which are gross margin accretive. The Street is modeling a down FY23, but we think earnings are likely to be up 20%+ vs FY22, which is likely to push the stock back above $100. As with ATZ, we’ll get heavier on this one in another Quad4 selloff…but we think the name is a relatively safe place relative to the rest of retail and should outperform on the red market days.
Canadian Tire (CTC.A-TSE) | Moving Higher on Best Idea Short List. The more work we do on this name, the more we think its headed lower by 30-40%. We first shorted it because the core Canadian Tire department store concept (if you’ve never been to one, think of Macy’s and Sears having a child), is putting up productivity (sales per sq ft) 35% above pre-pandemic levels, which is absolutely non sustainable in the face of a weakening Canadian consumer. Housing data, wealth effect, and consumer credit data all look terrible in Canada. It’s own credit book (about 30% of EBIT) started to crack this past quarter, and the stock hardly budged ‘bc its cheap’. Well, it's not cheap if consensus estimates come down by 30-40% next year – if not this fourth quarter. What has us incrementally bearish this week is the realization that 33% of Canadians have variable rate mortgages, and their monthly debt service just went from $1,200/mo to $1,600/mo. That’s hardly supportive of this company maintaining C$410 per foot in productivity, or its credit book remaining intact. The Street (all Canadian analysts/bankers) is looking right through the risk to the P&L, and keep in mind that this is a levered company -- C$5bn in net debt on top of a C$9bn market cap. We think this stock is headed back to C$100 – currently at C$148.
Overstock.com (OSTK) | Moving to the top of Long Bias list. This is like Best Buy/Circuit City all over again (for those that have been around the block and seen a few cycles). OSTK running a profitable model with a solid balance sheet -- not to mention blockchain optionality. It's got three competitors on the ropes -- all with the potential to go bankrupt. BBBY, Wayfair, and AtHome (private). That's about $18bn in revenue up for grabs. OSTK could, and likely will win BIG as this cycle plays out. Still too early to go all in as a Best Idea, but it's just a matter of time (and price).
