Movado (MOV) | New Short Idea. This company is pursuing a massive higher-price point strategy – butting up better brands with better cache – in precisely the wrong macroeconomic environment to be doing so. As background…Movado Group own brands are MVMT, Movado, Olivia Burton, Concord, and Ebel. It also has licensing agreements with 5 other brands – Lacoste, Calvin Klein, Tommy Hilfiger, Coach, and Hugo Boss – two of those brands are already on our Short List (Coach and Boss). Of the owned brands, MVMT and Movado are the two most popular and well-known. The Movado brand has been taking up price the last few years and in December launched a new top of the line watch (Alta) that starts at $3,800. Movado was traditionally a good quality brand for a reasonable price, a price that skewed toward the lower end. With these price increases the least expensive watch is now $400, and they are really trying to push up into the more luxury space. But it’s hard to change a brand image and perception – particularly in a space with such high end competitors that are so entrenched. The luxury space has plenty of established players. The watch aficionados aren’t the ones buying the $4,000 watches, they buy the $40,000+ watches. And the person who is buying a $4,000 luxury watch is more likely to buy the entry level Rolex than the top of the line Movado. The Movado name just doesn’t carry the same weight as Rolex does – and it never will. The gross margin historically averages the low 50’s, but in fiscal 2022 ended at 57.2% and management is guiding to 58% for fiscal 2023 (which is almost over, ends in January 2023). The recent price increases and additions of higher priced lines have no doubt helped increase GM but this high 50’s margin isn’t sustainable if demand for the product wanes, which we think it will. Historically EBIT margin is in the mid to high single digits, last year it was up to 16% and management guided to another 16% this year. This margin isn’t sustainable either. Licensing deals should at least provide some sort of predictable revenue stream but that is not the case for Movado, the license revenues are all over the place, up one year down the next. In a category where there was overconsumption in the last couple years there will be a slowdown in consumer demand, while the company is simultaneously going upstream in price. We think this will work against the company and the P&L. Bulls will argue that the stock is cheap at 8x earnings and 5x EBITDA, but we think that the lone estimate out there is wrong by at least 30% -- potentially up to 50%. Remember that mid-tier watches are largely in a secular decline, as it’s uncommon to see a watch on the wrist on anyone under the age of 30, and if so, it’s likely an Apple watch. The point is, this company was built to be cheap, and we think EBIT margins will stumble next year as discretionary spending slows and the company’s push into higher price points fails. Also remember that this company earned $2.50 pre-pandemic, and Consensus is at $4.61 next year. We think that sub-$3 is more likely over a TAIL duration – good for a $20 stock vs $36 today.
Gamestop (GME) | Moving Higher on Short Bias list. We outlined the stock view last week, the short term squeeze seen last week is making the risk/reward more attractive. Taking this a few notches higher on the short list. For the short thesis on GME see last week’s Retail Position Monitor Update CLICK HERE. If this stock keeps grinding higher we’ll make it a Best Idea Short in a heartbeat.
Acushnet (GOLF) | Moving Higher on the Best Ideas Short list. The stock has bounced back up to around $48. It’s hit the top end of Hedgeye CEO Keith McCullough’s risk ranges as well, who signaled that it was a good time to short this name at $48.49 at the end of last week. The only thing that has changed in our model since adding this to our Best Ideas short list in the fall is the currency impact with the dollar weakening over the last couple months. We’re still building to numbers well below the street with our 2023 EBITDA coming in around $278mm vs the street at $340mm. Meanwhile this stock is trading at 11x EBITDA and 18x EPS with the street’s 2023 EBITDA number 40% ahead of 2019 (which was a pretty good year for golf spending). Between reversion in unit consumption and recessionary spending pressures, particularly on the clubs/gear side, we think there is a lot of demand risk here. We are conservatively modeling ball consumption to stay elevated, but gradually reverting much like US golf rounds have been. This is a business with short product lifecycles, high marketing expense requirements, cyclical risk around discretionary spending, and tied to a game facing secular participation problems in the US. We’re not giving it more than an 8-10x EBITDA multiple, or 30% to 50% downside.
Arhaus (ARHS) | Moving higher on Best Idea Short list. The stock is up 29% in the past month (and up 150% from the summer lows), and despite a positive preannouncement, we think the Street’s numbers are too high over a TREND and TAIL duration. For those unfamiliar with the name, ARHS is a relatively high-end home furnishing retailer, and is likely the only brand out there that could MAYBE give RH a run for its money on the lower-end assortment. But the problem is that ARHS hugely benefitted from the pandemic – which caused it to subsequently go public, and we think it will see a big demand slowdown over the next three quarters. In addition, while ARHS has 80% of the locations as RH, it has only 25% of the square footage. Its stores are simply too small, and lack the scale/size to churn out high-end margins. In the latest quarter this company put up a 16% margin, which is well above where RH topped out when it was operating small scale stores like ARHS. The common view is that ‘ARHS is eating RH’s lunch’ bc it put up a 50-60% comps over the past two quarters. But ARHS is VERY promotional when demand ebbs, and we’re seeing that right now. EVERYTHING in the store is on sale – by an average of 30%. Could RH have put up a monster comp this past quarter? Yes. But it DOES NOT DISCOUNT its product. ARHS does. That becomes very dangerous when we enter a downcycle for home furnishings, like we are currently in right now. Sales growth slows, gross margins erode, SG&A de-levers, and margins crash. That’s what we think is in the cards for ARHS in the coming quarters. Is the stock expensive at 15x forward earnings? Not really. But on a downward revision with such little short interest there’s no reason this name can’t trade at 6-8x earnings on lower numbers. The street has EPS marching up to $1.00 per share over a TAIL duration, but we think that the $0.80 we saw over the past 12 months is peak for ARHS. This company went public when it did for a reason. Ultimately we think this is a $4-$5 stock (where it loses Institutional sponsorship), vs $13 today.
Urban Outfitters, Inc (URBN) | Moving Higher on Best Idea Short list. This stock is up 20% YTD, and yet we think that the fundamental outlook has gotten worse, with both per unit economics in apparel flipping negative with the latest CPI report, and with continued bloated inventories at URBN – particularly Urban Outfitters. But at last week’s ICR conference, management noted that inventories would trend higher – up MSD in total – with the majority of that increase coming from Anthropologie, which is 40% of cash flow and has so far been immune to the malaise we’ve seen in the industry’s margins. We think that’s the next shoe to drop. Mind you that this stock traded as low as 6x earnings last year, and is now sitting at 13x – which is about as high as we’d ever give URBN. So upside from here has to come from the earnings side of the equation, and we don’t think that will show up on the P&L, while the balance sheet continues to bloat. Overall we think we could be looking at 30%+ multiple compression on 20% lower numbers.
