Valvoline (VVV) | Moving Higher On Best Ideas Long List. The company is in the middle of its planned separation of VIOC from global products. 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 standalone entity. It will draw new and more appropriate analyst coverage and more investors will take notice of the model’s growth and returns. 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. VVV has performed well in recent months, still there are few names we are more comfortable owning into early 2023 given the pending positive catalyst while nearly the rest of retail will be facing earnings guide downs. We think after the separation VVV is headed to $50 over a TAIL duration.
Destination XL Group (DXLG) | Upping to Best Idea Long. We’ve been increasingly interested in this model over the past year. We highlighted it in our ‘Bone, Bagger or Bust’ deck as a long-term survivor – i.e. a name that’s likely to be a multi-bagger as Quad4 ends. Let’s be clear, this is Quad4 and apparel companies are dropping like flies in Quad4. That said, on a relative basis, we think the numbers in 4Q will prove to be better than the group. The company finally has inventory this year of Ralph Lauren, Vineyard Vines, and other brands it lacked last year, and is not promoting to the extent we see from other retailers. Signal strength in this name remains strong per Keith McCullough. Over a TAIL duration, this company is definitely a winner. We think institutions will be chasing this name after it doubles.
Ollie’s Bargain Outlet Holdings | (OLLI) Still Bullish Into Earnings This Week. The off-price retailers remain in a strong position as it relates to forward earnings growth opportunity. OLLI has seen its value proposition improve significantly YY, where it had tight inventories in 2021 making for challenging buys/deals. Now the inventory situation is one of the best environments for OLLI. We can see the pressure created in 2021, where visits per venue (i.e. comp visits) per Placer were down just 1%... yet comp sales were down 11%. So people were in the store, but didn’t spend, because the assortment and value proposition wasn’t compelling. We’ve seen the product available improve significantly since around mid-summer, including a large Target buyout being sold at a heavy discount inside Ollie’s stores. Traffic trends looked solid in 3Q, and OLLI looks to have had a strong Black Friday in visitation. The consumer here (low to mid income) is under pressure, but it benefits from trade down of the middle consumer that is looking for deals in order to spend. We don’t want to get too greedy with this name as it has worked since we went long in the Spring, and think it’s likely fair value around $70 to $80, but in terms of rate of change opportunity there isn’t many places in retail where you have easy compares and business likely improving.
Chewy (CHWY) | Cautious into 3Q Print, Bullish TAIL Neutral TREND. The stock has done well since the selloff on the last print (for our note from last Q see CHWY | Buy The Dip). We remain bullish on the TAIL setup for CHWY as a share gainer in one of the best categories of consumer in Pet. The category grows mid to high SD with continued shift to online and continued consolidation to the top players, particularly Chewy. Chewy is continuing to growth the Pet offering to penetrate more of pet parent wallet share with the new insurance offering launched this Spring and growing its vet Practice Hub, to gain share of vet med sales. That TAIL setup means we think the stock can hit $75 in 12 months. We think CHWY will remain one of the best growers in ecommerce over the coming quarters. Online interest is up YY (below), but the trend has been slowing. Overall the TREND setup is not overly bullish as customer churn pressure that CHWY, and most of ecommerce, is facing means it could be a couple quarters until we see the topline re-accelerating which could drive further multiple expansion. Until that point in time the stock Is likely stuck in a range of around $30 to $50. Given we’re towards the higher end of that, and we don’t have visibility to a material acceleration in the P&L anytime soon, we’re cautious on CHWY into the print. 
Amazon (AMZN) | Taking the bottom of our Long Bias List. We had this (correctly) on our Best Idea Long list earlier this year, and then pulled it off before the collapse last quarter. Rate of change is still slowing on what is arguably the most over-owned stock in the market. What concerns us is that Amazon is usually the company that invests in downcycles, and this time it not only announced wide-spread layoffs, but appears to have broadened that over the weekend. Keep in mind that this company has the best data about consumer spending and rate of change in the consumer out of any company in the world. So one needs to sit back and ask themselves what Amazon sees that the rest of the market does not. We think it’s another slowdown – and it's cutting costs aggressively ahead of that, something we don’t like as a long term strategy. Can we get to a value 2x where the stock is trading today using a sum of the parts model? Yes. But stocks don’t trade on sum of parts, and we think the fundamental outlook is likely to get worse in 1Q/2Q before we see signs of improvement. We’ve been vocal that most of our longs are probably shorts right now – that’s how bearish we are on retail. We’ll look to get more constructive on AMZN as we exit Quad 4 and the rate of change and risk of further weakness in the business is behind us.
Wayfair (W) | Moving Higher On Best Ideas Short List. The stock bounced this week on a decent Cyber 5 update noting LSD sales growth for the 5 day selling period and stating November improved from the -10% trend as of its earnings print for 4Q. That result was slightly worse than the data reports around black Friday and Cyber Monday suggesting Low to Mid SD growth for ecomm sales. Wayfair didn’t put out a corresponding release last year, though commentary on its call suggested weakness around supply chain constraints, punchline is it had an easy compare. There also was no commentary around margins or earnings. The space has been highly promotional, and we suspect W is seeing gross margin pressure YY. We saw weak performance and guidance from BIG this week, which is heavy in the home décor and furnishings categories suggesting continued inventory management (margin pressure). W’s acceleration is a slight positive, but we think there is a risk to slowing trend through the rest of the Q and into 1Q23. It also doesn’t change the fact that the company is losing money, a lot of it, while having a balance sheet problem with its $3bn debt load. We think the company will struggle to get to cash flow positive realm without risking lots of revenue and share. The company has put out hopeful profitability targets while the CFO that lead this company since the IPO is no longer with the company, leaving at the company’s most challenged financial position. Equity value continues to be at risk, W remains a Best Idea Short.
Apparel Retailers Getting More Bearish | Taking JWN, RL and OXM Higher on Best Idea Short List. These three names have proven incredibly resilient in recent weeks, and while we think that the sales environment will be fine in 4Q, we think that gross margins will severely disappoint to to the greatest magnitude of discounting we’ll have seen in the better part of 30-years.
- Oxford Industries (OXM) | This brand portfolio has proven the most resilient of them all, and we simply do not think its sustainable. This company is over-earnings on the gross margin line by 500bp vs pre-pandemic levels – nevermind recessionary levels. It just used its peak cash flow to buy Johnny Was, which we think was a mistake. It's guiding to accretion in year 1 of the deal, though due to excess inventories in its segment and a recent uptick in the level of promotions, we think it will prove to be dilutive. The stock has been strong – up 34% from September lows (in a +3% tape), and we think 4Q gross margins will disappoint. We think this management team is a C-, and has very little Macro process, which will catch up to the portfolio in 1H23.The consensus is underwriting $12 in earnings power over a TAIL duration, and we think the real number is closer to $8, which is good for an $80 stock vs $115 today.
- Nordstrom (JWN) | Taking Higher (Again) on Best Idea Short list. The fact that this is still a $20 stock after the print is stunning to us. The biggest takeaway from the JWN print was that 3-year stack comps were DOWN 4% in an apparel environment that put up +17%. This company is losing share – any way you cut it. We think it misses the lowered guidance for 4Q, and then guides down again when we see more normalization in the category in 2023 – that’s when market share loss should stand out like a sore thumb. We think there’s only $2.00 per share in EPS power embedded in JWN (Street at $2.50), and $1.60 of that is credit income – which deserves about a 5x multiple (though it is a near term tailwind due to higher balances on higher rates as well as higher late fees from a strapped consumer). Let’s be generous and give the retail earnings of $0.40 a 10x multiple – and all in you’re getting close to a $10 stock. The stock traded down on the latest print – but not enough -- its got serious (40-50%) downside from its current $20.
- Ralph Lauren (RL) | This is another stock that’s run with the retail group heading into Black Friday. It’s also one where we’ve largely been wrong to-date, and admittedly, our thesis is getting long in the tooth. But the brand is losing relevance, and unlike Coach, which has successfully downshifted its age to a younger and more fashion-forward demographic, we think that the Ralph Lauren brand is stale, and the only real growth from the model has come from higher prices (+8% AUR), something that we think will revert sharply over Holiday and into 1H23. RL’s brand is ‘stuck in the middle’ with higher end brands taking share on the premium end, and lower-end trendier brands taking share on the other. We like OXM better than RL short side, given that its over-earning to a greater degree. But we can’t get within 30% of the Street’s $13 in EPS power over a TAIL duration, with downside risk over the next six months.
BestBuy (BBY) | Moving Higher On Best Ideas Short List -- Again. We shifted BBY down our list in late September with the stock trading down into the mid-60s. Now, after we were wrong about the risk for earnings and guidance on the 3Q print, it’s going higher on our list after the rally into the high 80s. 3Q Comps were ahead, though still down 10.4%, slight acceleration vs last Q. Gross margin missed by 20bps, down 150bps YY, and SG&A drove the majority of the beat as it came in about 80bps lower. Management adjusted the full year by the 3Q beat, so holding 4Q outlook, which implies generally steady trends. This outlook is in stark contrast to TGT’s discretionary outlook, meaning not much directional slowdown from 3Q discretionary trend while TGT was explicit about a slowdown in discretionary categories like electronics in recent weeks. Inventories are down similarly to sales, so relatively in check, but the whole space is being promotional as the consumer overconsumed these core categories over the last 2.5 years. We don’t think this short is done yet. We’ll take the under on 4Q coming in ahead of expectations. Holiday will be highly promotional and then the expectation is for improvement in 1H 2023, which we don’t think we’ll see as the consumer starts to shut down the elevated spending as savings rate stops going down and revolving credit stops going up. We see forward EPS downside to $5 to $5.50 with the street at $6.50, stock downside to $50 to $60 with it currently trading at $87.
Adidas (ADDYY) | Taking down to the bottom of Best Idea Short list. We acknowledge that the valuation and price spread between Nike and Adidas is the widest it’s every been. To be clear, it’s deserved – as Adidas is losing share in virtually every business. From here, its all about what the new CEO has to say. And it’s tough for us to handicap the strategy as he comes out of the box. The only think that would get us constructive on the name would be if he comes out, and ups SG&A meaningfully to give innovation a heavy kick in the pants and take up athlete endorsements (and actually do something with it). Keep in mind that neither of these two were his strengths as Puma’s CEO. What we need to see is SG&A taking margins lower to accelerate top line sustainably, and drive gross profit dollars. That’s the only way names in this business work over time. We’re still short the name, especially on the 42% rip on the CEO announcement. Again, this will NOT be an easy transition from Puma (largely an apparel company) to Adidas (which is more of a 50/50 split between apparel and footwear). This recovery will take a LOT of time. If he comes out and stresses a heavy investment strategy, then this could be a big stock in 3 years. But that’s a lifetime from now. In the interim, we still think Nike will gobble up Adidas market share globally while the organization gets reset. It’s too early to ‘take a flyer’ on this name long side. We’re going to present a Black Book in January on the threat to the 50 year duopoly that Nike and Adidas have had in this industry on a global scale. We’ll dive deep into the changes in the market, consumer preferences, and market share across the entire industry. Stay tuned.
Academy Sports and Outdoors (ASO) | ASO Into Earnings. We don’t have a strong view on the quarter itself, but are comfortable with ASO on our Short Bias list. For the competitive set DKS and FL put up good 3rd quarters, while HIBB was relatively weak. ASO has some of the worst visits trends of the group trending down mid-teens YY. Whether it’s this quarter or coming guidance, there is definitely demand and margin risk coming for this space which should be coming relatively soon. We took Academy off our long list in mid-August in the high $40s after being long for about a year and a half. The Nike inventory situation is a risk. Nike isn’t huge at ASO, just 11% of purchases, maybe mid-teens of sales, but the pricing pressure from the inventory problems in athletic will hurt margins some here, and ASO can be very promotion in its marketing emails. Add on the fact that perhaps part of why ASO earnings have held up well earlier in the year is that its store base in concentrated in key US oil markets. With oil prices coming under pressure in 2H22 the core ASO consumer will likely feel a little less spend happy than earlier in the year. The stock looks cheap at about 7x EPS, but 2023 EPS estimates are probably about 20% or more too high. It’s hard to say what the right multiple is for this name right now, as it has unit growth, but is over-earning on trailing numbers. As the earnings are being revised lower over the next 4-5 months the stock likely marches lower.
Lululemon (LULU) | Thoughts ahead of Thursday’s print. We have no call on LULU, but if we had to make one today (which we don’t) it’d be long. The company reports earnings later this week, and based on our read of promotional levels, LULU is one of the least promotional retailers/brands so far this holiday. Let’s also face reality – this company has tremendous pent-up demand in China, and will be one of the biggest reopening plays outside of Luxury names. Nike likely makes the cut there as well. The company should beat this Thursday, and likely take up the year. Has it made mistakes? Yes. Mirror was and is a disaster. Footwear was a mistake, as we think the traction it's gaining in the space is below market expectations. But the apparel business, which is 95% of cash flow, is on fire. The company is executing on both product and price as well as we’ve ever seen it. Don’t be short this one into the print.
