INVITE | Luxury Goods/Handbags and Accessories | Deep Dive Black Book. We’re presenting a Deep Dive Black Book on the Luxury Goods Sector, with a focus on Handbags and Accessories on Wednesday, Dec 21 at 10am ET. We’ll take a historical look at this space over the course of multiple cycles, focusing on unit consumption, pricing and market share trends at the high-end as well as the ‘accessible’ ends of the spectrum, and will compare to what we’ve seen in prior Quad 4, recessions and consumer downturns. The space in this cycle has been particularly resilient, at both price classifications. The big question is whether the strength will/can continue, which brands are best positioned, and what kind of earnings power is currently being discounted in the stocks. Focus names will be LVMH Moet Hennessey Louis Vuitton (MC-PAR/LVMUY), Kering (KER-PAR/PPRUY), Hermes (RMS-PAR), Prada (PRDSY), Burberry (BRBY-LON), Capri Holdings (CPRI), and Tapestry (TPR). We’ll have some new calls – both long and short, and will likely be changing existing tickers around on our Position Monitor.
Call Details
Date/Time: Wednesday, December 21st at 10am ET
Add To Calendar: CLICK HERE
Live Video Link: CLICK HERE
Nike (NKE) | Thoughts into This Week’s Print. To be clear, we think this will be an ugly quarter for Nike, but we think that a) it will come in ahead of expectations, and b) importantly, will set up for positive earnings revisions throughout the rest of the (May) FY. The key metric to look at this quarter is Gross Margins – sales should accelerate due to the excess $3bn in inventory it had at the end of last quarter. But the company set expectations (in Gross Margins) that it would clear through the excess product over 9-12 months, but we think that it will have cleared more than half of that over the past 13 weeks. The Street is at $0.61 for the quarter, and we think Nike comes in better than $0.70. It’s pushed its inventory out to wholesalers – and shared little in the margin hit. Though it has taken more aggressive discounts on Nike.com. We think that’s fully baked into the -400bp GM guidance NKE set for the quarter, and then we’ll see meaningful sequential improvement from there. As for China – the other hot button – we’re looking for sequential improvement there as well. The company finally has the right product in China, after 2-years of using it as a dumping ground for excess inventory. The question is, with lockdowns, whether the consumer show up. Also, we think Nike has stepped up its investment levels in China meaningfully with influencers and athletes to stem share loss to the Li Ning’s, Anta’s and xSteps of the world. We think it’s taking share from Adidas, UnderArmour and Puma hand over fist. Do we love the stock at $105? Not really. We liked it a lot better when it bottomed out in the mid-$80s after the last print. But we don’t think it will see those levels again. Across retail, we think that ~90% of retailers and brands will face 30-40% negative earnings revisions next year, and with Nike, we think it’s already taken its lumps, with numbers to be revised upwards from here. Bottom line, we’re comfortable owning Nike into this earnings report – especially with such little on the docket that’s ownable in consumer discretionary.
Hugo Boss (BOSS-DE/BOSSY ADR) | Going Short Hugo Boss. Hugo Boss is a high-end Apparel and Accessories brand, but one without the margin and return structure to match. We think that BOSS is over-earning, and will have a down 2023 and likely earn ~€2.75 at best in earnings while the Street is looking for €3.30 in EPS. We’re particularly cautious on the company’s US business, which is over-earning by 200-300bps, and should compress in short order. The company is relatively geographically diverse, though over-earning in the US and is heavily reliant upon Europe (65% of sales). Europe poses its own Macro and industry-specific challenges, which won’t be kind to Boss’ P&L. We think that the company’s product assortment around holiday is falling short (being discounted heavily at wholesale and retail), and the company will experience a meaningful Gross Margin hit as inflation spreads make their way to the higher-end of the apparel supply chain. We think numbers need to come down next year by ~20%-40% -- similar to other apparel names. But unlike other apparel names this one still carries a serious multiple at 16x earnings (names with similar risk are at sub 10x EPS). Ultimately we think this name trades at a low double digit multiple on €2.75 in EPS – which is good for a €30-€35 stock vs its current €52, or 30-40% downside.
Lululemon (LULU) | Going Short LULU, Again. This is a tough call for us, as we’re a fan of LULU long term. But we think it’s the right one. Over the weekend, we revisited the entire industry, and picked out the companies with the greatest inventory imbalance – to spot check our Gross Margin expectations. And the reality is that with 85% inventory growth in the latest quarter, we don’t think the markdown risk is appropriately represented in expectations. We ‘get it’ that the stock traded down on the latest print when we saw the big reveal on inventories. But this name trades at 30x earnings, and barely beat the latest quarter. It stretched. And is likely a tell for the upcoming quarter. Despite what the company says, we don’t think its foray into Footwear is as strong as the company would like you to think. And next year it will face upwards of a 500bp comp headwind as its blowing out its lower-price-point ‘belt bags’, which has attracted a lower-end consumer to the brand. We’re about in line with consensus for next year, but with a 1H miss and better earnings in 2H on a China reopening. If LULU just ‘hits’ numbers instead of putting up average 20% beats, we think we see multiple compression, and there’s no reason this name can’t trade at closer to 20x earnings with multiple Quad 4s still ahead of it. It’s one we want to keep on a short leash, but if our model is right and LULU misses 1H, this stock could correct sharply into the mid $200s vs $321 today.
