OneWater Marine (ONEW) | New Short Idea. This story is similar to our MarineMax (HZO) Best Idea Short – but potentially better. Adding to our Short Bias list while we dig deeper on the research call – but likely a Best Idea candidate based on what we see today. Much like HZO, ONEW is a roll-up of boat retailers in the US. The company went from 37 dealerships in 2017 to 96 today – almost entirely through acquisitions. During that time of free money, the company levered up to over 3x EBITDA while it also benefitted from the boom in outdoor sports, including boating. Revenue per store went up by 100% over 5-years, and EBITDA margins went from 5% to 15% and are sitting at a level that is completely unsustainable in the face of consumers levering up in a higher interest rate environment. The average price of a boat at OneWater is well over $300k, which we think is a dangerous price zone for the coming consumer environment. The stock naturally looks ‘cheap’ at 5x EPS, but we think that the earnings estimates out there are wrong by a factor of 2x, as we expect inventories to bloat, price per boat (new and used – new boats are 70% of sales) comes crashing down, and margins see cycle lows. Next year, we have the company earning close to $5 vs ~$10 per share this year. TAIL earnings are likely $2-3 ps. That pegs this stock at $10-$15 – or 60% below where the stock is trading today. Again, this has Best Idea Short written all over it. We’re putting it mid-way up our Short Bias list (instead of at the bottom, where most new ideas usually start). Likely to take this one meaningfully higher on our conviction list. Stay tuned…
On Holdings (ONON) | We’re comfortable with our Best Idea Short positioning for ONON into earnings on Wednesday, and would press the short if the company comes in ahead. Simply put, we think the company is stuffing the wholesale channel, so it might show better realized revenue on its P&L, but inventories are rising at retail. This company is simply growing too fast, and it is not stratifying product across retail channels (we think Hoka/DECK is doing it right and would be buyers of that name). You can find the same On product at nearly every wholesale channel, and we think that heavier levels of inventory will cause the company’s margin structure to permanently crack. Mind you that this brand didn’t even exist in the last cycle, and this is a rookie management team that is growing units faster than end consumer demand. The fact that Nike has a $3bn inventory problem certainly doesn’t help the equation. Will this be the quarter that the story cracks? We think that inventories will rise, margins will disappoint, but the outsized revenue growth will keep hope alive and allow people to remain bulled-up on the brand and the stock. But we think that sometime in 2023, the growth rate slows dramatically, gross margins will permanently reset due to discounting, and DTC growth will subsequently slow. That’s when we get 40-50% draw down on a single day – putting this stock closer to $10 than its current $20. Remember that this name carries a serious multiple – 25x EBITDA and 3.7x sales – both of which could get cut in half.
TJX Corp (TJX) | Sell Some Into The Print. Though this is a Best Idea Long, we’d sell some with the stock in the $70s into this Wednesday’s print. We added the name to our Best Idea Long list in the low $60s, and it's one of the rare examples in retail where we can point to multiple expansion over the past two months. Inventories across retail (especially in apparel) are the most elevated we’ve ever seen – and EVER is a long time. TJX should benefit from an elevated retail inventory climate – but only as it buys discounted product for pennies on the dollar, packs it away, and sells at this time next year. That’s why we’re so bullish over a TAIL duration. But near-term, the company needs to compete with the elevated sales we’re already starting to see at retail, and expect to intensify throughout 4Q. Traffic trends at TJ Maxx and Marshalls have not been good (see below), with a notable downturn over the past two weeks. Home Goods remains problematic. This is one of the best management teams in retail, and they’re very ‘Macro Aware’, which tells us that a guide-down is more likely than not. Do we still think this is a $125 stock over a TAIL duration? Yes. We’d just rather be buyers when the group sells off over the next few months and takes TJX to the low $60s.
Home Depot (HD) & Lowe’s (LOW) Earnings on Tuesday and Wednesday respectively before the market open. We’re bearish on both of these stocks, with risk to home retail demand from lower turnover and lower cashout refi renovations due to the higher interest rate environment. The consensus view is that these retailers won’t face a single down comp despite a housing slowdown and consumer recession. We don’t expect this quarter to have the big fireworks, and we think we’ll see results similar to that of FND a couple weeks back. 3Q relatively inline and some tempering of 4Q expectations. Store traffic has been down (chart below) but pricing and ticket has likely held in reasonably well. The market, and the home retail space in particular, really liked the slight CPI miss late last week. Rates did have a big short term downward move, but we don’t think there is anything here to suggest the Fed does anything but stay the course on its hawkish policy. The impact of rising rates and home wealth effect will be seen on home retail in the coming months/quarters. For a replay of our Home Retail Deep Dive Link CLICK HERE. On November 23rd we’re going to dive deeper on the models of the home improvement retailers (HD, LOW, and FND) to detail out more specifically why these names are all on our Best Ideas Short list.
Target (TGT) | Reports Earnings On Wednesday before the open. TGT’s inventory problem has not been resolved, though the consensus gross margin expectations look reasonable given the guide downs so far this year. Where we think there is earnings risk over the TREND and TAIL is on revenue and SG&A deleverage. So far it doesn’t look like this would be an ugly quarter, generally retailer numbers are ‘okay’ in 3Q on decent demand trends in Aug and early Sept, but guiding down slightly with some cautionary forward commentary. TGT’s visit trends in 3Q look similar to that of 2Q, though just the last few weeks have seen some material slowdowns. Our call is around the persistent earnings risk in a consumer slowdown while the street has EBIT margins recovering rapidly (forward 12mos) to levels ABOVE 2019. We think that’s a stretch as we are just heading into a US “main street” recession. All of the upside in operating margin over the last 2 years has been on SG&A leverage. Yet the street has SG&A rate going to new all-time lows in 2023, and sales continuing to growth despite the rising pressure on discretionary spending for the US consumer. If the top line holds up due to sticky inflation, the inflation will also pressure SG&A. However, we think the more likely outcome is sticky inflation on wages/SG&A, while sales go negative. For a replay of our TGT Short Black Book Link CLICK HERE
Valvoline (VVV) | Reports Earnings Tuesday before the open. The company is in the middle of its planned separation of VIOC from global products. The quarter should look fine. Visits are flatish YY while pricing is up and with slightly accelerating trends over the last few weeks and the customer gains from the pandemic looking like they are sticking. We think VIOC is one of the best assets to own in retail and deserving of a large multiple given how many boxes it checks for a public market investor, from unit growth, comp growth, high margins, franchising optionality, amazon protection, low cyclical risk and strong consumer value proposition that is gaining share. The stock probably won’t recognize its full potential until after the separation given both the expected buyback and deleveraging, as well as the market getting to watch the VIOC model execute as a stand alone entity. After syncing with our DC policy team, we don’t have any immediate concerns for the separation being stopped due to CFIUS or competitive dynamics. We find it very hard to see how Aramco owning the Valvoline lubricants business would present a national security risk. Still our policy team is keeping an ear to the ground around the issue. We think after the separation VVV is headed to $50 over a TAIL duration. 
