Urban Outfitters (URBN) | Moving to Best Idea Short List. Inventory problems at the Urban Outfitters concept have been well telegraphed – but have yet to be fixed with the SIGMA still sitting in Retail Quad4, and we think that promotions are kicking up at Anthropologie (about 40% of cash flow). We have yet to see the required negative earnings revision, the likelihood for a negative surprise remains high. 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. The stock has ripped by 40% since September, and we think it will give it all back in 1Q23. We’d be interested in owning this close to $20 vs current $39.
Inter Parfums (IPAR ) | Moving Up to Best Idea Short List. We added the short side in late July around $80, and it currently sits at $97. Translation – we’ve been wrong. But in tearing through and vetting the underlying thesis, it’s still in-tact. 2022 was a banner year for Beauty, including fragrances, and we think that there will be a meaningful slowdown in growth at lower margins in 2023. Recent data points are suggesting the consumer is starting to feel some ‘beauty fatigue’ and the category is showing some cracks. 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 17.5% EBIT margin, which is unsustainable. This stock is worth closer to $50 vs current $97.
Adidas (ADDYY) | Taking from Best Idea Short to Short Bias. We outstayed our welcome on this one. Originally long, we pivoted Short in Aug near $80 (with the stock currently trading at $62) due to our concerns about brand momentum in China. Then it fired the CEO, lost its $2bn Kanye business, and share loss globally in core Adidas styles became apparent. It had traded lower, but ripped 20% on the announcement of the new CEO coming in from Puma. To be clear, this brand has ZERO momentum in the marketplace. We’re still short this name, but the downside from here isn’t enough for us to make a big call given that we have NO idea what the new CEO’s strategy will be. The shame here is that we actually liked Kasper Rorsted’s strategy – it was to not go toe-to-toe with Nike anymore, but rather to play its own games on its own terms. That’s something we can backstop/underwrite. To be clear, we think his firing was premature – and all boils down to him ‘guaranteeing’ growth in China this year, which was foolish to do. Sales will likely end up down 20-30%. A mistake, yes. But now we’ll have a new CEO, with a new strategy – something that will take 2-3 years to play out – if it even works. The valuation and market cap gap is the greatest today between Adidas and Nike than it’s ever been. Ultimately, we need to hear what the new CEO says, and more importantly, watch what he does. Keep in mind that Puma is a much smaller company, and is skewed towards apparel vs footwear, and Adidas needs to fix its footwear game. If he talks up a margin story, we’re likely to get more bearish. The reality is that this company needs to spend MORE In SG&A (including endorsements) in order to reignite brand heat – even if it takes earnings negative. Once that happens, we’ll be more comfortable getting behind this story. The only way these models work is with outsized top line growth, Gross Margin improvement, and SG&A de-leverage. Nike has proven that. This industry has been a global duopoly for the better part of 30 years and we’re presenting a black book in early 1Q to dive into whether that is breaking down, or if this is a temporary disruption. Stay tuned for more details…until then, just stay away from Adidas – the catalyst calendar is VERY long dated from here. If you have a 5-year duration (congratulations, first off) but may be worth taking a flier on this name long side despite all the unknowns. We however, do not.
Acushnet (GOLF) | Moving Higher on Best Ideas Short List. This stock is trading at 18x EPS and 11x EBITDA on peak earnings. We think we’re at the beginning of the end for the boom in golf demand. Macro matters in this category, particularly the wealth effect, which per our Macro team is now rolling over and going from tailwind to consumption to headwind. We think as corporate earnings fall, layoffs ramp, and employment concerns start to matter as it relates to consumption on the higher income consumer (core golf customer). In the last recession, golf equipment sales fell about 22%. Yet consensus expectations don’t have a single down year, and -1% in the worst single Q for sales at GOLF. The most bullish part of the business is balls, as we think rounds can stay elevated as core golfers leverage work from home to hit the golf course more often. The perceived boom in golf was driven much more by core players playing more, as participation in 2020 and 2021 averaged just 1.5% growth, while rounds averaged 9.5% growth. Rounds in 2022 have fallen, down 2.5% through October, and we’d expect some gradual reversion, but potentially settling above 2019 levels. As we look at clubs, footwear/apparel, and gear we think the consumption risk is high. Elevated sales over the last 3 to 4 years means higher replacement, with some pricing increases. Like any other durable goods, golf clubs can go several years before needing to be replaced, and there is no major innovation on the horizon to drive an accelerated replacement cycle. Online interest on google for balls and clubs is falling (chart below). GOLF has a new TSR line of drivers/woods that just launched, but it generally looks like modest tweaks from the prior TSi lines. Also common after a few years of elevated sales into a weakening economy is a build of quality used inventory of clubs just a year or two old, particularly drivers which then presents pricing pressure for the marginal transaction. Expectations look too high for GOLF over TREND and TAIL durations. We see EBITDA falling to $275mm in 2023, while the street is looking for growth in EBITDA to $340mm. Our model still has 2023 sales 23% ahead of 2019 levels, maybe that’s too bullish. A fair multiple in our view is around 9x, or $25 to $30 per share, putting downside in the stock of 35% to 45%. In a bearish scenario we think EBITDA could head closer to $200mm and the stock cut in half or worse.
Getting More Bearish On Luxury Boat Retailers…Making OneWater Marine a Best Idea Short, and Taking MarineMax Higher on Best Idea Short List.
- OneWater Marine (ONEW) | New Short Idea. 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 4x EPS, but we think that the earnings estimates out there are wrong by a factor of 3x, 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.
- MarineMax (HZO) | Higher on Best Idea Short List. We think that the acquisition binge this company is going on is a tell. Like, a bad one. Reminds us of CROX at $120 when it bought Hey Dude for $2.5bn, the core slowed, and management pulled a slight-of-hand to focus on a different initiative – and then the stock lost nearly half of its value. CROX is actually a name we’d own at a price – stay tuned there – but MarineMax caters to the ultra rich who will not fare well in multiple Quad 4s. This is the ultimate ‘negative wealth effect’ stock. Earning $8.50 this year, compared to $1.50 per share pre-pandemic. Successive Quad 4s won’t have people buying $3mm yachts, which leaves less supply to fill the new marina and marina services acquisitions. This boating cycle collapsed FAST in 2009/10, and we expect the same this time around. 5x $3-4 in earnings gives us 50% downside from current levels.
FIGS (FIGS) | Taking higher on our Short Bias list. This one has worked out well for us, we went short this name in July at $11 calling for $4-$5. It tested those levels last month when we shifted it lower on our short list, but it recently rallied back up to lower highs at $7.40. We still think there’s downside here, and by no means do we buy into the argument that this is ‘the Lululemon of scrubs’. Success begets competition, and FIGS is attracting a lot of it with a very thin competitive moat. With half of its customers earning less than $50k/year, we think that sales will come under pressure both during and post holiday – when we think the consumer hits a wall. We think Gross Margins and top line are both at risk over the next 6-9 months, and think that a serious guide-down is in the cards. This is not a structural short, as we’d be interested in owning it – but that’s likely closer to $3. We think we’ll get our shot in CY23.
Ollie’s Bargain Outlet (OLLI) | Staying Long on 3Q selloff. This name is up slightly since we went long in May a down retail tape. Earnings so far have been weaker than we expected. This Q comps accelerated, though with weaker than expected growth as management cited the slowdown late in the Q similar to what we heard from TGT. The gross margin improvement is net positive as the company had to cut price to move product in the middle of the year, now the merch buys have been better so the regular margin has a compelling enough value. There are two concerns we have with our Long positioning. One is the consistently weak forecasting from the management team. It can’t seem to guide a number it can hit. With the revision down to 4Q, hopefully that changes from here. The other concern is the overall consumer health. OLLI should benefit from trade down and excess inventories, but we are very bearish on the consumer in aggregate over the coming 6 months. Perhaps regardless of the value proposition improving comps won’t be as bullish as expected. Still, as we look at the companies that have the ability to drive top line and earnings growth with accelerating trends headed into 2023, OLLI is one of the names on a short list in retail. Even with the guide down of 4Q EPS is expected to be up mid-teens while compares into 1H23 are among the easiest in retail. Visit trends over the last couple weeks look to be improving as well. OLLI might not revisit the highs around $70 from mid 2022, but we think its still a relative long with absolute upside of 20 to 30%. That should create alpha relative to our bearish view on retail over the next 3 to 6 months. 
Rent The Runway (RENT) | Short The Rally. We think that this is an incredibly unscalable business that has no chance of ever growing meaningfully in its core, or ever turning a profit. We were very vocal about taking a hard pass on this deal last year, and the stock performance since tells you what you need to know. $176mm in Cash, $275mm in Debt… the company is going into cost cutting mode and guiding to positive adjusted EBITDA, but the cash flow profile this year remains ugly with ~40mm in CFFO burn and $30mm burned in investing. We think this equity is headed to zero or very close to it as perhaps the core holders that took it public bring it private in advance of a full bankruptcy.
