Mister Car Wash (MCW) | New Long Idea. We’re adding MCW to our Long list. This is a simple model….the company operates just over 400 car wash locations in 21 states, and is very steadily growing units organically by about 5%, and is acquiring units in this massively fragmented industry at about twice that rate. The company pioneered the ‘subscription model’ where you pay a flat fee per month – about $27 on average – for unlimited washes. It’s a sticky model, and even in Quad4, cars need to be washed. Currently, subscription revenue accounts for about 66% of total, up from 49% pre-pandemic. The bear case is that we’ll see slippage in the subscription rate in this recession, which we’re modeling to a slight degree. But then we see a mix shift towards higher margin non-subscription washes. Note that the incremental cost to wash a car is close to zero, so we want to see the subscription business remain as high as possible, but we think it will hold at 60% even if attrition kicks up a notch. Over a TAIL duration, we think it pushes 70% of sales, which gets us to numbers above consensus. We’re modeling EPS 15% above consensus this year (with only two quarters left in the year) and then 20% ahead for 2023, and 50% ahead over a TAIL duration. We’ve been watching the stock for some time, but have always preferred DRVN (Driven Brands) which owns a car wash business, but also has oil change, glass repair and auto maintenance businesses that are near recession-proof. If we had to buy one of these two stocks today it’d be DRVN (it’s a Best Idea Long). But with MCW’s stock down at $8 – off 65% from trading levels post its June ’21 IPO – we simply think it’s at a price that’s too low to ignore. The stock is heavily shorted, with 20% of the float short the stock, and it trades at less than 10x our TAIL EPS estimate. As we de-risk the churn risk around subscriptions, and the company beats the Street’s EPS estimates, we think this stock is good for 40% upside over the course of a year, and a potential 2-year double – like DRVN. Definitely a Best Idea candidate. As is our process, it’s starting out at the bottom of our Position Monitor, but is very likely to make its way higher as we get deeper in the research and our conviction on the name builds, which we think will be the case.
Helen of Troy (HELE) | New Short Idea. This is simply a bad company that’s egregiously overvalued on REAL earnings. HELE is a low-quality portfolio of brands spanning the Beauty, Home, and Outdoor segments. Major brands include Hydroflask, Osprey, Honeywell, Braun, Vick’s, and Beauty Brands Hot Tools and Drybar. It’s a hodge-podge of brands that don’t belong together that offer up very few synergies. 42% of its sales go through Amazon (19%), WalMart (11%) and Target (11%) – all of whom we expect to put increasing pressure on their suppliers. Let’s be clear about something here…this is not a management team that runs brands well. It is good at acquiring them, then using non-GAAP adjustments to manufacture earnings power 2x the REAL earnings number. The Street looks right through the accounting gimmicks, and underwrites the wrong earnings numbers. Unfortunately, the company is tapped out in financial leverage, and no longer is in a ‘free money’ environment to do deals given rising rates, and does not have the internally-generated cash flow to acquire. Without deals it runs out of accounting adjustments. That means that ‘adjusted earnings’ mean-revert to GAAP earnings, which we think are $3-4 per share, compared to the $12 the Street is looking at over a TAIL duration. This stock looks beaten up and cheap. But it’s headed a LOT lower. We think that a fair multiple on these brands is 10x at best. Next year our estimate is $6 vs the Street at $10. Over a TAIL duration, we have estimates coming in at sub $4 as the company runs out of ‘adjustments’ and is no longer to fuel the growth engine with deals. 7x EBITDA on that number gets us to a stock at $30 vs it’s current $89. Don’t let the chart fool you – this name is NOT at the tail end of a bottoming process. It’s headed a LOT lower. We’re breaking rank with our process and are putting this mid-way on our short list (instead of adding at the bottom, as we do with most new ideas). This name has Best Idea Short written all over it. More research to come.
Home Improvement Names (FND, HD, LOW) Moving To Best Idea Shorts. In presenting our Home Retail Deep Dive conclusions to investors over the last week, nobody seems to be able to describe why we won’t see a very challenging housing and home retail environment over the next 6 to 12 months, yet few if any are positioned for that risk as it relates to these home improvement names. The pushback is generally that you want to own these names long term, and they are cheap. But we are not at trough multiples, and earnings are nowhere near reflecting the risk we see in a housing downturn and continued slowing consumer spending environment. In the great recession HD comped down 14 straight quarters, yet the consensus doesn’t have a single down quarter in expectations for HD. FND is still trading at 21x earnings despite the fact that its business has significant demand risk around reduced home turnover and high refinancing rates. The street doesn’t have anything worse than +5% comps in the outlook for FND. Mortgage rates continue to tick up, and we think these stocks are headed for a rough 6 months. To be clear, we’re likely buyers of these stocks at the right time and price – especially FND -- but now is definitely not that time.
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Decker’s Outdoor (DECK) | Still Best Idea Long into earnings on Thursday. Buy more on a conservative guide. No movement here on our Position Monitor, but we want to make a quick comment ahead of earnings as this is a high conviction long that we think is safe to own into this print. We think numbers look fine – we’re looking for a 5% beat on the EPS line – a rarity in retail these days. Hoka top line should continue to impress – we’re at +47%, and we think that this is the first quarter where Hoka in aggregate will be bigger than 50% of the total portfolio. Granted, the big seasonal quarter for Ugg is the one we’re currently in (which will shrink Hoka back to about 40%), but we think that brand extensions will keep Ugg growth positive. We don’t think that Nike’s inventory problem will hurt Hoka, like it will Adidas, Puma, and UnderArmour. Part of the reason is that most of the inventory problem is in apparel, and Hoka has an admittedly weak apparel game – it’s one of the biggest opportunities for this company. Yes, we expect the company to guide down its fiscal 3Q – but it does this every quarter without fail. We think this name is a double over a TAIL duration. Sum of parts model below.
Inter Parfums (IPAR ) | Moving Higher On Short Bias List. We added the short side in late July around $80. Recent data points are suggesting the consumer is starting to feel some ‘beauty fatigue’ and the category is showing some cracks. OLPX blew up this past week with consumer demand slowing, and beauty visits trends per Placer are slowing. IPAR is going to see pressure like the rest of the beauty space. IPAR is a good business as a key licensee partner for brands in the fragrance space. 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 unsustainable. This stock is worth closer to $40 to $50 vs current $75.
Warby Parker Inc. (WRBY) | Removing From Short List. We went short this one in December with the stock around $45 calling for 50% downside. The stock subsequently fell to $11 in June, and has traded up slightly since. There’s no earnings in this model, so its hard to argue a valuation floor, but the market appears to be stating that the floor is in the low double digits given the stock hasn’t traded down since mid summer. There’s nothing structurally wrong with Warby, it’s a quality brand with a good consumer value proposition. Our short call was predicated on overly bullish growth and profit expectations in consensus and implied in the stock price given the company’s expensive real estate selections. That looks to have played out as 2022 EBITDA expectations have been cut in half since December and the multiple has also been halved, though still trading at a growthy 35x EBITDA. Revenue compares get much easier going forward and topline expectations have fallen about 20% since the start of the year. WRBY has a solid balance sheet, while the market looks to be punishing leverage. Short interest still over 20%. We’re not buyers of this model here given the macro backdrop, but think the short is on its last legs.
YETI Holdings (YETI) | Moving Lower on Short Bias List. When we went short YETI in 2021, we thought the stock was worth something in the $20 to $30 range vs at that time trading in the $70s. The stock is now sub $30 and trading at 7.4x consensus EBITDA. This short likely isn’t over, as earnings numbers still have some downside risk given the overconsumption of outdoor durables and coolers/drinkware that is YETI’s core business. But we have to acknowledge the drastic change in risk/reward given the stock is down 40% in 3 months and down almost 65% on the year. Still likely another 15% to 30% to go, but shifting this one lower on our short list.
Rent-A-Center Inc (RCII) | Moving Lower on Short Bias List. We elevated this just 5 weeks back with the stock at $26, now falling near the mid teens and trading at ~4x EPS after the company reset earnings lower, we’re shifting it down on the near term risk/reward looking less attractive. This is staying on the short side model has a ton of leverage (as the market is punishing levered balance sheets) and serious pressure on the core consumer and core product offering (lease to own home durables). For now we think other names present better short term opportunities on the short side given RCII already guided down via pre-announcement.
The RealReal (REAL) | Staying on Long Bias List. We debated taking this name off the Long list since no takeout has happened despite the price continuing to fall. The announcement of Amazon getting into resale with “What Goes Around Comes Around” is potentially bearish for REAL, though it also means if Amazon competitors want to try to stay ahead of the online juggernaut, buying REAL is a way to updgrade their luxury resale operation fast. So if a deal is ever going to happen, the time frame for it to be done was just compressed. 
