1Q23 Retail Themes Call THIS WEDNESDAY. On Wednesday January 4th at 2pm ET we are hosting a Retail Themes call for 1Q2023. Here we’ll provide our take on the setup for consumer/retail earnings and positioning on stocks as we head into calendar 2023.
Topics to include:
- 3Q Earnings Teardown and New TREND Expectations.
- Inventory Trends
- State of the US Consumer
- Retail Cycle Valuations
- Retail Debt And Cash Flow Risk
- Private Label Retail Card Income Trends
- Preannouncement Cadence/Expectations
Call Details
Date/Time: Wednesday, January 4th at 2pm ET
Add To Calendar Link CLICK HERE
Live Video Link CLICK HERE
Pool Corporation (POOL) | Going short POOL. This name fits right in with our bearish view on retail in 1H, and the precipitous decline we expect to see in spending around the Home. For those of you unfamiliar with POOL, it operates in the wholesale market for pool supplies, to both consumers and installers, and saw a massive boom in profitability around the pandemic. This company earned $5-$6 per share pre-pandemic, and is currently on track to earn $18 this year, which naturally, the consensus is modeling will be sustainable over a TAIL duration. Sales per store were ~$3mm pre-pandemic, and are now coming in closer to $6mm – something we think is utterly unsustainable given that 41% of sales come from equipment and supplies to contractors installing new pools. To its credit, the installed base of pools is higher today, so its chemical business – only 10% of total -- will likely see a permanent lift. But 49% of revenue comes from ‘other products’ which includes everything from gas grills, outdoor lighting and lounge chairs – something which people already bought and don’t have to buy again for 5-10 years. In our model, we have the company putting up store productivity down 10% in 2023, down another 5% in 2024 and 2025. That still gets us to productivity 25% higher than pre-pandemic (again, due to the higher installed base of pools), but materially below the Street. The company is an aggressive buyer of its stock, something we think will evaporate – even at a lower price – as the business declines, and it’s staring at maturity of its $1.5bn in floating rate debt that comes due in 2026. Ultimately, our 2023 earnings estimate is coming in at $12 vs the Street at $17, and we’ve got TAIL earnings of $10. This stock carries a serious 18x p/e multiple – unlike other high end retailers that trade at mid-single digit earnings multiples – and trades and a (more relevant) 14x EBITDA. We think this stock has material downside to earnings and the multiple, and is not overly shorted with only 8% of the float held short. We think there’s 40-60% downside in this stock. It’s starting off midway on our Short Bias List (usually we start off at the bottom) and as we get heavier in our research we suspect this will be a Best Idea Short.
Five Below (FIVE) | Adding to the Short Bias List. Diving in on the model here we debated some bullish and bearish points. The bear case won out.
On the Bull side, from a rate of change perspective, the model looks net bullish with the P&L accelerating into easy compares with store growth ramping in the coming quarters. Though this setup is probably what stock has been pricing in with the rally of over 50% from its summer lows. Visits look decent in 4Q up around low to mid single digits (note that’s total visits, not comp visits) similar or slightly better than 3Q. Though the trend has been slowing recently outside of the week of Christmas where FIVE most likely benefitted from the extra shopping day in the week ahead of the holiday. Unlike much of retail, the company is not over earning after recent moderating sales trends and SG&A reinvestment has driven cost deleverage. Trailing EBIT margin sits at 10.4% vs the pre-pandemic observed range of 11% to 12%. Though the company did exit 2021 with what looks to be an overly efficient employee per store setup, running 10 to 15% below where it likely should be (though that has probably changed some with SG&A increase during 2022). Macro Quad historical performance looks to be working in FIVE’s favor as it historically performs well in Quad4 (chart below), though we don’t have public history for the company in a real consumer recession vs ‘regular’ Quad4.
On the Bear side. TREND expectations look a little high particularly around 1H comp expectations. The question around sales trends is as the consumer continues to face spending pressure into 2023, will we see FIVE take on some trade down transactions, or see core customers eliminate some visits? On a quick spot check FIVE’s comps have moderated in some consumer slowdowns we have seen this cycle, but as noted above, it hasn’t seen a real recession as a public company. Pretty much everything FIVE sells fits into the discretionary category. Low priced discretionary, but discretionary nonetheless. FIVE at least is facing some easing compares having just had 3 Qs of negative comps. Still, we think there is risk to comp expectations with the consumer starting to turn off the spending spigot here in early 2023. We’re coming in with EPS for 2023 about 10% below consensus. That’s a risk with the PE multiple sitting at 32x, the market expectations are high. Also a negative signal is the company seeing several insider sales last month after a sizeable 3Q beat and 4Q guide up (a month into the Q) on a strong back to school season and early start to the holiday season.
We’re coming out net bearish thinking you have 20% to 40% downside risk as this is one the highest multiple names in a retail tape that we expect to be annihilated on weakening discretionary spending. This stock perhaps makes sense as pair vs OLLI, with a similar rate of change setup (P&L improving into easy compares) while FIVE has a bit more risk to discretionary spending being shut off and carries a higher multiple with likely more aggressive consensus/market expectations. If we see FIVE 30% lower with some downward revised sales expectations we’d likely be buyers of this one.
Nike (NKE) | Taking a Notch Higher on our Best Idea Long list to the #2 slot. This decision didn’t come easy, as it supplanted CPRI, which remains a very high conviction Long that we think is good for a triple over a TAIL duration. But the reality is that in going through the model over the weekend, we think the consensus came out for the quarter about 10% too low. We can’t stress enough how difficult it will be to find retailers/brands beating expectations in 1H23. Nike should be one of them. Yes, we’re still concerned about elevated inventories, but think that Nike is pushing out maximum pain to the rest of the wholesale ecosystem (FL, HIBB, ASO, DKS, KSS, JD/Finish Line, etc…) and guided too conservatively on the impact of its own P&L. Do we think that Nike will make you rich at $117 trading at 25x EBITDA? No, we don’t. Longer term we’d look to names like RH and CPRI to do that. But we think that revisions at Nike are headed higher in one of the most tumultuous periods for retail in a generation. Signal strength looks good, and over a TAIL duration margins will push 18-19% vs current 13% as the company blows out its direct-to-consumer model, which would likely make this stock double. The stock looks expensive, but aside from the whole group melting down, we don’t think the company will provide a negative catalyst (like 90% of the rest of retail will) to actually make the stock go down.
Kering (KER-PAR/PPRUY ADR) | Taking to the top of our Long Bias List. Getting more constructive as we get deeper in the model and get pushback from investors. This one is a recent big pivot for us (we had been short the name). We came out positive on LVMH and short Kering last month, though the big change since then is that Gucci, which is ~75% of cash flow for Kering, has fired its creative designer – the one responsible for going too far over his skis with collaborations with lesser brands like The North Face and Adidas among several other ‘mistakes’. While we don’t know who the new creative director at Gucci will be, we think the CEO is going with a ‘back to luxury basics’ strategy in elevating the Gucci brand, cutting SKUs by 30-40% and taking up price points. Let’s not forget that this name is a major China reopening play, which is not fully backed in our above-consensus numbers. If we’re right and the Gucci brand is elevated and China recovers, this name could trade at 25x a higher earnings number vs 14x today. Strong downside support with this name, and big upside if we’re right on the new brand strategy. Let’s also not forget that the 40% of revenue that’s not Gucci is performing extremely well – Saint Laurent and Bottega Venetta, Alexander McQueen, and others. We’re conservatively assuming 140% return over a TAIL duration – but if the company makes the right moves, this stock could triple. We’re likely going to do a deep dive Black Book on this name in 1Q. Stay tuned…
