Home Improvement Names (HD, LOW, FND) | Moving Much Higher On Best Ideas Short List. We continue to gain conviction in our short calls on the home improvement names after just adding them three weeks ago. As the research gets deeper, so does the conviction. The common feedback we are getting appears to be that these names are likely to see some weak demand trends over the coming 6 months of so, and a ‘slight selloff’ will present a buying opportunity. Our take is that these names are over owned, and under shorted, far from trough sentiment and the coming demand weakness and downward earnings revisions makes for a solid short opportunity – with 30-40% downside in the group – which is great beta-adjusted downside on mega caps like HD. On November 23rd we’re going to host a Black Book to dive deeper into the models and investment theses on these three companies, specifically to outline what we think the risk/reward looks like on TREND and TAIL durations. We’d certainly want to own these businesses at a time and price, but now is not that time. Mortgage rates continue to rise, demand trends are likely to slow, and we think the market doesn’t appreciate how weak comp trends can be in a housing downturn and how much margins are likely to de-lever. Heading into 3Q earnings season, the results probably look decent, pro business backlog helping (especially HD and FND), though we are seeing comp visit trends running down double-digits in recent weeks across all of these names, pricing/ticket probably still holding in for trailing periods. With the housing market and consumer heading into recession, we expect to see these names materially lower in the coming quarters.
Weber Inc. (WEBR) | Removing From Short List. With the announcement of the company going back private to top holder BDT Capital Partners (with 87% stake) buying the remaining float at $6.25, we’re removing it from our short list. It’s a crazy price, with the multiple so close to 20x EBITDA in 2023, though BDT doesn’t have that much stock left to buy. This never should have been public, and it makes a ton of sense that it is heading back to private ownership. We went short at $16, the trade is done here with the deal at $6.25.
Sleep Number Corp (SNBR) | Moving Down To Short Bias. We went short this name at $110, added to Best Ideas Short at $95, and after this week’s massive earnings cut, the stock is now at new lows in the high 20s. 2022 has been revised from EPS of $7.40 coming into the year to $1.71. 2023 from $8.27 to $2.07. Is the bottom in for earnings revisions? Maybe not quite yet, but with a much lower earnings bar, compares getting easier, and a stock about 40% below its pre-pandemic level with a share count 23% lower, we think we are getting close to the bottom for SNBR. Mattress unit consumption can still see pressure in the coming year, particularly with the risk we see in housing, but the better way to play the industry risk from here is likely short TPX.
Urban Outfitters (URBN) | Moving higher on short list. One of the most dangerous looking SIGMA charts on our list. Inventory problems at the Urban Outfitters concept have been well telegraphed, but we think that promotions are kicking up at Anthropologie (about 40% of cash flow). When the inventory/sales spread is so out of whack and we have yet to see the negative earnings revision, the likelihood for a negative surprise goes up materially. We’re fans of the company in general, and would want to own it at a price, but we still think there’s another shoe to drop. We’d be interested in owning this close to $15 vs current $25.
Etsy Inc. (ETSY) | Moving Higher On Best Ideas Short list. We re-added ETSY to our Best Ideas list in September with the stock around $110. With the multitude of negative data points in tech and ecommerce this week we’re upping this one on our short list. Maybe the 3Q trends were ok, google interest looks decent and generally when this stock holds up relative to other names, trailing credit card data looks good. But where we think there is clear risk is the forward demand risk, much like what was signaled in guidance by AMZN. OSTK is prepping for a promotional holiday, as is Amazon, and inventory availability for every retailer will be much better YY, so ‘handmade’ items on ETSY won’t become a default purchase avenue. As of mid 3Q, ETSY has lapped the inorganic contribution of its international acquisitions, though still benefitting from its price increases on sellers. We continue to think ETSY will see slowing trends with customer churn risk and high discretionary exposure heading into a recession. The CEO, that admitted to uncertainty and discretionary exposure risk at a conference a month or so back, is selling stock in size every 2 weeks on a 10b5-1. This week the ETSY CTO was announced to be departing, as the company tries to improve its site search functionality. Real EBIT estimates continue to fall while adjusted EBITDA comes in ahead with help from rising stock based comp, and ETSY is trading at nearly 19x that adjusted number, about 5 turns off the mid year trough. In that context the relative multiple here for ETSY compared to others in ecomm, and particularly AMZN, makes little sense to us given the lack of quality growth in the TREND model. We think this stock should be trading in the $50 to $75 range when the market digests the demand risks. The stock currently sits at $98.
Canada Goose (GOOS) | Short Into Wednesday’s Print. The biggest pushback we get on this name is that it looks cheap at 12x earnings. But the Street is underwriting $1.26 for this year and $1.50 next year – numbers that we think are too high by 50%. This name sits on the top of our Best Idea Short List – and we think if that if we’re still short this in 6 months, we’ll be wrong. We think this model cracks soon. The inventory in the channel is way too high, compound that with the $2.5bn in retail-value inventory sitting on the company’s balance sheet. The wholesalers are pushing back on maintaining a full price model, especially when the product is showing on off-price luxury sites and even the likes of TJ Maxx, and some higher-end wholesalers are threatening to stop carrying the brand if it cannot discount product without repercussions of future product flow, The brand is past its peak, it’s overexposed to China and Europe (which is a major concern), and we think is losing share to incumbents like Moncler and other cold weather brands globally – not to mention battling upstart brands going after its jugular like Save the Duck, and even quality brands with big ‘puffy coat’ presence like Aritzia, not to mention the more utilitarian brands like Arcteryx, Patagonia, and Columbia. The real earnings power here is well below $1 per share, which should make this a $10 stock within 2-quarters. GOOS is a very ‘macro unaware’ management team, and who knows if they have the foresight to lower guidance ahead of the 4Q print. But numbers here look egregiously undoable. This should be a single digit stock. Currently at $17.40.
Revolve (RVLV) | Short into this week’s print. This company has a big inventory problem, with a 50% negative spread vs sales. It’s had a 65-80% sale on its excess inventory for much of the past month, and has been flowing inventory into the system at a level that we don’t think is sustainable – and outright reckless given current competitive inventory levels. Revenue trends might look decent because of the rapid flow of promotions, but the Gross Margin here is likely to be downright ugly, and earnings revisions are almost certainly headed lower. The Street is looking for $0.10 in EPS, a 54% decline vs last year – about the same YY decline as in 2Q. We think its highly likely that this name loses money in 4Q, and likely guides that way. The name still carries a serious multiple – 27x earnings and 16x EBITDA, which is way too high for a share loser (especially in gross profit dollars) in a space that has way too much competition and inventory. Let’s also not forget the secular challenge here in that used to be a special ‘influencer-led’ model with small scale buys on limited runs that were very fashion forward. But it’s going too deep with inventory buys, product assortment, and pricing. It’s basically turning into an online version of Nordstrom. 31% of the float is short the stock, which would ordinarily alarm us, but keep in mind that high short interest is actually a style factor that works short side in Macro Quad4.We’re unlikely to cover this name until it’s a mid-teenager – currently at $25. 
The Container Store (TCS) is reporting Tuesday after the close. This name is on our Best Ideas Long List, elevated on the 3Q print hate selling, though the stock has performed poorly since despite decent earnings results. With the stock trading at sub 5x EPS, the market appears to be pricing in a big EPS cut. Could numbers come down some from here? Sure, but we struggle to see an earnings revision that would put this name trading at a fair PE, which we think is somewhere in the low to mid-teens given this company is re-entering unit growth mode. This isn’t one of our highest conviction long names over the near term, but the setup is reminiscent of our ASO Long earlier in the year, with the market pricing in big earnings risk while overall trends are unlikely to get “that” bad. Traffic trends are below, and like most of home retail they are down YY, but the trends generally look the same or better than where it exited fiscal 1Q. Punchline is this could be another quarter of somewhat squirrely results, and tempering of guidance, but we’re not sure how much downside risk there is for the stock in that context.
Big Five Sporting Goods (BGFV) is reporting Tuesday after the close. 3Q visits trends for BGFV looked decent, and expectations are relatively low, with EPS expected to be down 75% YY and comps down 10%, so the company could hit the street number on the quarter. The risk on this event we think is around forward commentary. Visits trends look to have slowed in recent weeks, and the industry outlook has been getting less positive. The whole athletic space will be under pressure from a promotional perspective as Nike, Adidas, and Skechers have all highlighted elevated inventories that need to be reduced. That will pressure margins at retail. BGFV has the some of the highest earnings risk over a TREND and TAIL duration that we can find in all of retail. With no Nike to drive traffic, and core categories that are likely to see consumption reversion, EPS for BGFV could be heading to $0.
Wayfair (W) reports earnings Thursday before the open – we’re bearish. We know demand trends are likely to look ugly after the OSTK revenue miss, and AMZN revenue guide. The market should be aware of that, the consumer is not shopping the core Wayfair categories at the moment. The issue for this print by W is how will profits and cashflow look. This company has a balance sheet problem. It did a convert with just awful timing as it relates to driving equity value hitting higher market rates and a trough stock price relative to what it could have done a year and a half ago. The company needs to cut costs out fast to preserve cash, but that will continue to pressure share/sales trends, and the W model doesn’t really work if revenue is falling. CFO Michael Fleischer (the CFO brought in to take this public) is retiring and out of the seat within weeks (November), this comes as the company faces its worst financial situation of its entire public history. We think Wayfair equity value remains at risk. We added this to our Best Ideas Short list at $275 and it remains there – even at $36. There’s a definite ‘non-zero’ chance that this company goes bust.
Gildan Activewear (GIL) Reports Thursday before the open – trends not looking good. The reads on the basic apparel space are not good. Gildan hasn’t been guiding so we don’t have “already lowered” expectations. The street is expecting flattish results in 3Q, and 4Q down slightly. Meanwhile HBI guided to earnings down about 50% in the back half of the year, and CRI just reported a 3Q miss and big guide down of 4Q. Cotton prices remain highly volatile, which creates the combined risk of higher costs in the supply chain, yet printwear distributors looking at falling spot prices and want to see shirt pricing come down. That’s historically a bad recipe for Gildan earnings. With the recessionary environment corporates are likely going to be cutting marketing budgets as well, which pressures demand on shirts screenprinted with company logos for promo/events. The stock looks somewhat cheap, but we think you have 10 to 20% risk to EPS, and still some multiple risk on numbers going lower. Downside risk to around the mid-20s vs current $32. Not one of our top shorts, but likely headed lower – potentially this week.
Visto Outdoor (VSTO) | Bearish on this Thursday’s print. Some of the ugliest SIGMA trends in the comprehensive book we published this evening were in the Guns & Ammo and Outdoor space – which is where VSTO lives. The SIGMA chart is in the most dangerous Quadrant – which is Quad 3 (too much inventory, but with margins still positive YY), with the latest directional move heading in the direction of SIGMA Quad 4. That suggests to us that the likelihood of a downward earnings revision is high. The Street is underwriting $7 in earnings power this year – and $6-7 in perpetuity. We think a slowdown in ammo sales takes a meaningful cut to earnings, and potentially jeopardizes the company’s plans to split this company up next year. It’s admittedly cheap at 5x earnings, but again the real earnings power here is likely closer to $3-$4 per share – or 40-50% below consensus. Earnings in this space move fast – keeping in mind that the company earned less than a buck pre-pandemic.
Bath & Body Works (BBWI) | No change to our positioning here – still long this one. But worth noting that it has one of the more bullish looking SIGMA charts – in stark contrast to its former sister company VSCO. Margin rate of change went squarely negative last quarter, but this is one of the few companies that we don’t think is sitting on too much inventories in an otherwise extremely defendable business model.
