Helen of Troy (HELE) | Moving Up To Best Idea Short List. Getting deeper on the research on this one, and we think its ultimately a $30 stock vs current $89 – definitely Best Idea Short status. 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.
Camping World Holdings (CWH) | Adding To Long Bias List. I get it, this is a category that people think is over-earning, and the company missed the quarter last week and guided down. Today might very well not be the right time to go long this stock – with the consumer ready to hit a wall in Q123. But in listening to the conference call this weekend, I was stunned with how ‘Macro Aware’ CEO Marcus Lemonis really is. The company is seeing softness, particularly in the new vehicle category (50% of Revenue and 25% of Profits), and Strength in the used Vehicle segment (30% of sales and EBIT). The company also offers finance and insurance, roadside assistance, and other product that make up the remainder. Management is running this business exceptionally well. Locking down costs, building new stores and keeping the doors closed until the cycle turns, and most importantly, is putting in low-ball bids for competing Mom and Pops that offer them two options – take the bid (accretive in year 1 to CWH) or be put out of business by CWH organic growth. Yes, this is partially a roll-up, which we’ll always assign a discount to. But it’s the earnings power of this model that really gets me. The company printed $6.88 last year, and we think its good for a buck lower in 2023. Hence, not on our Best Ideas list – yet. But once the cycle turns, this name should absolutely rip, in part by multiple expansion, but where we think you really get paid is on earnings growth. Kind of like the inverse of HELE, this is a company that should generate $10+ in earnings within 3-years, which is good for an $80+ stock. The consensus is only underwriting $3.50 – and should be proved horrifically wrong. This name is hated by the sell side and buy side alike, with a Sell side price target at a measly $31 (stock now at $26), and short interest is 20%. As is our process, this name will start at the bottom of our short bias list and will likely head meaningfully higher as we de-risk the cycle, and/or when management opens the spigot on the growth model here and proves the consensus wrong. This name could be a 3-bagger over a Tail duration, with $10 bear-case downside support. It’s rare to find such a ‘Macro Aware’ first-rate management team in a category of One – (competent) competition simply does not exist – and won’t -- ever. Start doing the work on this one…it’ll pay as we get out of Quad4. Great pair against Marine Max (HZO) which is a Best Idea Short.
UnderArmour | Moving Higher on Short Bias List. Simply put, this company should have guided materially lower in its print last week, but it did not. Bad move for a historical ‘guide down and beat’ company. Aside from the brand having no heat whatsoever, it is going to have to absolutely decimate margins while it spends up to re-ignite any form of growth in POD1. The stock looks washed out and cheap – but cheap relative to what? History? That’s irrelevant. This brand used to be relevant. Now its on life support. We hear from bulls that this can be a smaller and more profitable company. But we think it will be a smaller and LESS profitable company if it does the right thing and spends up in R&D, marketing, innovation, and convincing the consumer that this is actually a brand worth buying. That’s no easy feat. I can count on one hand the number of times I’ve seen this happen in 29 years. The company guided to about $0.25 in EPS in its back half (FY end March), but our model is coming in closer to Zero. We think the company is underestimating the extremely high likelihood that Nike clears out its $3bn in excess inventory in 9-12 weeks – instead of the 9-12 months it suggested on its conference call. It this a huge short here? No. It’s at $8.29 and we think it heads to $5 or below. But nonetheless, we think revisions from here will be negative, and we’d short the pop on the delusional guide it issued last week.
Capri (CPRI) | Thoughts Into Earnings Wednesday. To be clear up front, this is a Best Idea Long – behind only RH (but perhaps with more defendable downside), and we think that it pushes $180 over a TAIL duration as Versace and Choo (and what will likely be another luxury fashion house added to the mix over 18 months – a brand with the allure of Dolce & Gabbana). [Note…the market won’t give management the ‘right’ to do a deal today, but when the growth and margin trajectories crush it at Choo and Versace over 12-18 months, it should be crystal clear how good this company is at executing on deals. For now the best use of capital is repo, and management knows it.] The core Kors business looks healthy to us today based on all we can see. No deep discounting, as promotional cadence in about on part with last year. In the Kors brand we’re looking for a MSD negative comp off a big 2Q22, but expect the company to sustain its ~25% operating margin – the cash cow that fuels the rest of the CPRI portfolio. We think that Jimmy Choo is killing it right now, as the company’s execution and growth initiatives are coinciding with a strong cyclical rebound in women’s dress footwear. We also expect a strong quarter from Versace with a strong uptick in operating margins – keeping in mind that they are at 17% and on their way to 30% -- particularly as the company extends into leather goods and accessories. The elephant in the room is FX, which has gotten worse since the company’s last guide at its analyst meeting. You never know what this company will say about forward guidance. At $47, it has a free pass to take down numbers – just like every other retailer has done. My sense is that it probably trades down on the print (as almost every retail name has), even though I’m looking for a headline beat. Either tempered FX guidance will pressure the stock, or the company will beat and maintain the year – which people won’t believe, but should. Important to watch the cadence of repo, which I expect to be aggressive this quarter. Regardless of the outcome, we’re buyers of this stock in the $40s (as I suspect the company will be). If you can get it with a 3-handle on a bad Quad4 day and a squirrely guide, then knock yourself out. Consider it a gift. I don’t think you’ll get that big of an opportunity. But if you’ve got duration, this is one of the few to stick with – it’s going much much higher.
CPRI SUM-OF-PARTS MODEL
Allbirds (BIRD) | Thoughts Into Tuesday’s Print. Best Idea Long BIRD – which has been a big Quad4 loser puts out numbers on Tuesday after the close. I debated even previewing the quarter, because the fact is that simply nobody cares about it. But that’s one of the reasons I like it. This is a real legit footwear brand – something that only comes around every few years. Yes, the company is losing money, and growth has been inconsistent. But we’re expecting the company to accelerate its wholesale model, which should be a big boost to growth, consistency, and brand recognition. The company admittedly started slow with wholesale with one partner in each region, though we thing a larger scale rollout at Foot Locker is highly likely, into 1,000+ of FL’s FL global stores – not to mention selective specialty store rollouts globally. The fact that this is a $3 stock is simply stunning. The company has no debt, and 50% of its market cap is sitting cash. Will the company smoke the quarter on Tuesday? Probably not. It’s still losing money, and is being impacted in part by Nike’s inventory overhang, and that’s a problem – until its not. This is one of those names that could easily go up by 5x once growth accelerates through wholesale and the company approaches break even.
PLBY Group Inc (PLBY) | Earnings Wednesday after the close. This quarter is unlikely to be a make or break on the bull/bear thesis. After last quarter’s weak result, the market is about as bearish on PLBY as it can be and on the bull side it’s going to a few quarters of execution before investors are ready to get fully behind this exec team again. We’re coming out slightly ahead of consensus on both revenue and EBITDA, though trends are likely to slow in the quarter. There are few things we’ll be looking for to stay bullish on the PLBY value unlock opportunity.
- Licensing. This is the company’s crown jewel. If it sold Honey Birdette, Yandy and Lovers, and fired 80% of corporate, the cash flow stream that would come from the royalties would alone be supportive of a double digit (debt free) stock. That’s not the plan, but that’s your activist ‘clear out management’ bull case. What we want to hear more about is the progress the company is making in transitioning to a master Chinese licensee (like Li & Fung) that will monitor and govern the excess product being made that PLBY isn’t earning a penny on. This remains a massive opportunity for the company. The 2% blended royalty rate the company is generating today on the $3bn in end retail sales is pathetic – the lowest we’ve ever seen in the history of retail licensing models. It’s got to change.
- SG&A expense trend to be supportive sustainable cash flow and liquidity. The management team expressed it was comfortable with liquidity after the SG&A cuts a few months back, so any indication that further cuts are needed would be net bearish. We’re not expecting much on that front.
- Data points suggesting brand health continues for Playboy and Honey Birdette. These brand have been hot over the last year or two, so we want to see evidence that demand remand strong with the consumer and that the company is strategically deploying capital to sustain the brand health/growth.
- Some directional improvement for CENTERFOLD. The leadership team has put a lot of time and capital into this initiative, it needs to be showing some signs of improvement in its ability to drive engagement and purchases. The company did a big relaunch this summer, and added more capabilities to the platform. If it isn’t making real progress within about 6-9 months it might be a sign it’s not going to work. CENTERFOLD is both a liability and opportunity as it relates to the PLBY valuation. If continuing to underperform while being invested in, the market will punish the valuation of the other businesses. But if it can start to show real momentum and real monetization, it could rapidly change the valuation profile for PLBY.
We think PLBY is trading below a liquidation value of the company assets, between Honey Birdette (recall the recent price for Adore Me by VSCO of $400mm), licenses, and physical art/photography/content assets. But if the businesses don’t show directional momentum the stock wont be getting a bid. An organizational change moving the current CEO into a different role and bringing on a new head is another thing that could be incrementally bullish. In fact, though we’re not in the ‘fire Kohn’ camp, such a release would likely more than double the stock overnight. We’re not sure it changes the long term outcome here, but it would definitely get the investment community more positive over the near term. Things that would make us incrementally bearish would be any incremental cash/liquidity concerns, any sign of real cracks in brand health (note that simply seeing slowdowns are not in itself a brand concern given the state of the consumer and apparel retail marketplace), or any departure of top leadership most notably Rachel Webber and Ashley Kechter given they are key to the long term strategy around brand positioning and DTC product portfolio.
Dillard’s (DDS) | Expected to report Thursday, though we won’t know for sure until the day before as is the recent DDS process. The company won’t be giving guidance and won’t have a conference call, so all of the fundamental reads have to come from the press release and 10-Q. Store visit trends from Placer are below, which suggest visits in 3Q were down double digits, but slightly better than 2Q. We expect pricing/ticket to see some pressure given the weakening consumer and the ramping promotional cadence in apparel retail. In 3Q we’re coming out around 6% below the street on EPS on revenues a couple points below consensus. The real question for this quarter is what will the direction of revenue and gross margins look like. The will most likely slow, but the question is how much. If they don’t slow its very bullish – and borderline perplexing -- if they slow a lot its beyond bearish. That may seem obvious, but the near term cash generation is a very important part of the bull case on DDS, as incremental cash flow means the company can sustain stock buyback with a very limited base of floating shares keeping the stock marching up. The company is slowly going private with continual buyback if the cash generation holds up. We think DDS is materially over earning with its gross margins going up 1000bps in the pandemic. We see those margins reverting to mid-single digits within about 12 months and earnings trend to $10 to $12 vs the street at $24, that would put a fair value around $100 to $150. That might not matter for the stock anytime soon if the company can put up better than expected cash flow over the next couple quarters and keep deploying that in share repo. Of any of the shorts on our list, this one makes us the most nervous over the TRADE/TREND duration given those tight float dynamics.
