GameStop (GME) | Going Short GME. We originally went long GME at a split adjusted $3.70, and got off it at $42. But a LOT has changed since we booked the win. A year ago we did a deep dive into GME trying to assess what a turnaround big bull case might look like. In that presentation we got to a Bear case value of $40 ($10 after the split). Since then the market multiples have continued to compress, and the GME fundamentals (particularly margins) have fallen apart. With the consumer slowing and data continuing to support deteriorating macro, that Bear case is evolving into the Base case, and the Bull case opportunity is shifting further out into the future. GME’s stock finally breaking down and the meme stock rallies have dissipated since late summer. The HODLers have been getting beaten up in many meme stocks (BBBY approaching bankruptcy and $0, AMC keeps making new lows, and crypto assets/platforms collapsing). It’s going to be hard to hold GME stock if/when it continues to trade down if sitting on gains. We think it’s time to add this short side, starting with it low on the Bias list. Near term a revenue beat might be the risk for the short, as store visits look decent relative to most of retail (with store count likely down) and the company has high inventory levels. Though we’d suspect margins are under pressure much like the rest of retail. GME is trying to reduce headcount and cut costs like many other consumer companies. The turnaround under Ryan Cohen may very well work, but it will require a lot of time and capital to execute. Cohen himself in a recent interview was very clear about how challenging the GME business is and that a turnaround wont be easy. In the meantime in Macro Quad 4 the equity value could trade much lower. We’d put a fair value here in Macro Quad4 around $5 to $10 ($3.50/share in cash still as of 3Q) vs current $16. Maybe if the stock is approaching the mid-single digits speculation starts around Cohen taking this private.
Leslie’s (LESL) and Pool Corporation (Pool)| LESL New Short Idea. Taking POOL higher on short conviction list. As we dig deeper into the state of the consumer, the retail landscape in 2023, and more specifically, the dollars likely to be spent on the Home (or lack thereof) we’re getting heavier in our short positioning around the pool ecosystem. We like the POOL short better, as it’s more geared towards the hardware around installing new swimming pools, which we think will come to a grinding halt this year, as such, we’re taking it higher on our position monitor. But we can’t overlook LESL either. The stock has traded down to recent lows of $13, but our earnings power in 2023 and 2024 is half of the consensus as sales of Spas and pool hardware come under severe pressure. The company’s chemicals business (49% of total) should remain resilient due to a higher embedded base of pools, but the higher margin discretionary part of the company’s offering should comp down 20%+. In fairness, approximately 80% of the company’s products are what it considers non-discretionary. But we’re modeling an aggregate 5% hit to comps this year, while the Street is modeling sales to be up. Ultimately, we build to EPS of $0.51 with the Street at $0.81 – with minimal growth over a TAIL duration. The stock trades at 15x Street numbers, and we think could easily trade at 10-12x ours, which is good for another 40%+ downside in the stock. Again, we think POOL is the ‘go to’ short in the space here as it’s more tied to the newbuild and refurbishment cycle. But LESL isn’t done going down.
LoveSac (LOVE) | After a 20% rip last week on the Chairman buying stock, we’re taking this name higher on our short list. We went short this name at $91, and it’s now down to $27 – but we think it’s going to have a rough time comping in 2023. The Street is looking for 19% EPS growth in Fiscal 24(Jan), which we think is high by 30%. The stock no longer looks expensive at 11x earnings, but we simply think the ‘e’ in the P/E equation is still wrong. About 85% of this company’s business is selling ~$5,000-$10,000 sectional couches (far from cheap), and we think home furnishing demand will be particularly challenged in 2023. This company can easily comp down 10-20%, which is in no way, shape or form in consensus estimates. LOVE is a unit growth story, so we need to handicap that in our estimation of a trough multiple. But with a broad-based 20% sale on everything on its site to start the year, we don’t think it’s off to a good start.
Lululemon (LULU) | Taking higher on Short Bias list – tactically around ICR this week. The company will be hosting meetings (no group presentation) around the ICR conference, and we don’t think the incremental tone of business will be good. Simply put we’re seeing more discounting out of LULU than we can recall in recent memory (last quarter’s inventory ended +85%). Half the sneaker assortment is on sale, there are more rounders and sale items than we saw in the store at this time last year, and we think that Gross Margins will be worse than the company guided on its latest earnings print. Our sense is that the company blesses EPS for the quarter, which is an extremely rare occurrence for LULU – as it perennially guides higher. We think it’s good for a 10%+ downside move over the short term. To be clear, these short term calls ‘are not where live’. We’re looking for 2-3-year multi-baggers and names that can get cut in half short side. LULU is the kind of company we’d actually like to own long term, but simply think that at 30x earnings, incremental pressure on margins that was likely not in the company’s plan, and only 3% of the float held short, the stock is likely headed lower this week.
PetCo Health and Wellness (WOOF) | We’re punting this name from our long bias list. We’re simply not seeing the business recover in our traffic data, and we think it’s increasingly losing share to big box retailers and online players like CHWY and AMZN in consumables. We remain big fans of the vet clinic rollout in ~1,000 stores, but think that it’s proving to more expensive and cumbersome to hire vets, and vet techs at economics that make the initial return appealing to us, or accretive to the model. This name trades at 9-10x EBITDA, is highly levered, and is still going through ‘valuation discovery’. With how bad retail is likely to trade in 1H of this year, there’s no reason why this stock can’t slide another 20-30%. We’ll revisit at a better price and/or when our research call sees a positive inflection in fundamentals.
Macy’s (M) and Boot Barn (BOOT) | First two preannouncements for Holiday out on Friday from BOOT and M. BOOT was out as the first preannouncer Friday morning prior its appearance at ICR this coming week. A slight bottom line miss with EPS of $1.74 vs the Street of $1.78, but beat on top line – revenues of $514.6mm vs the Street of $509.7mm. BOOT is riding some of the hottest fashion trends and operational performance of the last couple years, and it still can’t beat EPS. Not a good read for retail in total. Merchandise margins were down 190bps in the quarter, but mainly citing freight expense, still the accelerating promotional environment has to be having an impact. But as part of our thesis on this company says, its product is a more long-lived so they have less promo and discount risk than other parts of apparel and footwear.
As for Macy’s on Friday afternoon, revenue was revised to the low end of its’ prior guidance and a management left a massive range for EPS of $1.47-$1.97. Either the company doesn’t want to guide down yet, or it has no better idea where earnings will come out than it did 6 weeks ago. M Management knows January could be ugly, and it even stated “based on current macro-economic indicators and our proprietary credit card data, we believe the consumer will continue to be pressured in 2023, particularly in the first half”. The company also noted Cyber 5 was in-line with expectations, while the week ahead of Christmas and after were better (matches what we have seen in recent data with extra shopping day in Christmas week, and warm weather and sale events perhaps aiding the week after). The other weeks of Dec were weak, suggesting the holiday pull forward, at least outside of those that always procrastinate to the week of.
Expect a big wave of pre-announcements the next couple days. We think we’ll continue to hear the tone of holiday sales ranging from okay to weakish, with margin volatility, while management teams get cautious around early 2023.
