Wolverine Worldwide (WWW) | Adding as New Long Idea. TAIL Triple? Yes, perhaps a sign of the apocalypse, but we’re actually adding a long to the ledger despite how bearish we are on Retail for the next two quarters. WWW is one of the largest footwear brand portfolios that is squarely beneath most radar screens. It owns brands like Merrell, Sperry, and Saucony, among others. The company is in phase 2 of a restructuring that started well before the retail malaise started in November of 2021, and we should see cash flow accelerate materially in 2H of this year which should result in a rapid de-levering of a company that now stands at 3.5x debt/EBITDA – which is too high for a company in this business. The company already preannounced negatively late last year, and set expectations at a level that we think is beatable in the upcoming quarter. It is selling its Keds business and a leather tanning facility – which should net about $150mm after proceeds while pulling working capital out of the business, and that should go right to lowering debt levels. We’re modeling $1.95 vs the Street at $1.63 in 2023, and have that building to $3.25 over a TAIL duration (FY25). The company should be beating numbers while we’re in the heart of Macro Quad 4, and then earnings and cash flow should accelerate when retail multiples should take off in 2H23. It currently trades at 7x earnings, and if we’re right on the model, this should have no problem getting a low teens multiple in another 6-9 months on better than expected numbers. That gets us to a $25 stock vs $13.50 today. Over a TAIL duration, we get to something in the high $40s. Ultimately, we think this is a TAIL triple. We’re starting this name off mid-way up our Long Bias list (usually they start off at the bottom), but is highly likely to rapidly ascend – likely to Best Idea status – as we get deeper in the research, or if the stock moves against us as the group comes under pressure over the next several months.
Revolve Group (RVLV) | Moving a Notch Higher on Best Ideas Short List. This company has big margin risk over the next couple quarters. Promotional cadence remains very high as the company sits on too much inventory and too many SKUs. Numbers for 2023 still need to come down yet the stock carries a huge multiple on consensus forward estimates at 29x EPS 17.5x EBITDA. The stock had a rip late in the week with the greater ecommerce squeeze, as this is a high short interest name at 26.5% of the float short. But we think the operations here will prove to show that RVLV has lost its unique value proposition from back on its IPO, and the model is much more like an over-assorted online department store with low growth, and apparel margin cyclicality. Stock is worth something in the low to mid teens vs current ~$25. We think this is a short that should largely play out over the next 3 to 6 months.
Monro Inc. (MNRO) | Reports its Q3 this week, moving higher on Short list. We expect an inline Q with cautious commentary around the forward outlook. Calendar 4Q visitation trends have look reasonably weak in the auto maintenance space (though better in quick service oil change). Pricing might save comps in terms of performance vs expectation, but its cost pressures, particularly in labor, remain an issue here. Stock trading at 12x EBITDA and 25x PE. This is a business that underinvested while being mismanaged in its rollup days several years back. Now management is trying to reinvest, most notably in technician talent in a tight labor market as demand is slowing. That means big margin risk and lower returns on investment in the coming quarters, something we think the stock is not priced for at these elevated multiples. As we see it, the model needs MSD comps to work, and industry demand signals suggest we likely won’t see that for a while -- if ever at MNRO. Management has invested in underperforming stores to get their productivity up, which is leading to good comps in those stores, but it means the prior “good” stores are comping down. We think this stock is not deserving of the current multiple given the lack of profitable growth. Rather we’d argue this no to low growth model should trade around 8x to 10x EBITDA or 15x to 20x PE for a stock price around $25 to $35 vs current $47. Best Idea Short and a potential pair to the names we like in auto service in VVV and DRVN.
Wayfair Inc (W) | Taking Higher On Best Idea Short List on Bigger Than Expected Move. The market really seemed to like the layoffs and cost cut announcement from W this week, though the stock reaction is likely a short squeeze with ~35% of the float short. It’s a bit surprising to us that the stock moved as much as it did especially since widespread layoffs were definitely expected. The company has to move fast to try to cut their way to positive cash flow. But the company commentary around the cost cuts continues to suggest that some other costs will increase and that we won’t see the full op ex reduction flow to the bottom line. Meanwhile, we think revenue and margin trends will be under pressure for several quarters in this business and cost cuts won’t drive top line growth. So the announced layoffs were a necessary first step, but W is far from being in the clear as it relates to its liquidity risk. It wouldn’t shock us to see the company do a deal – at a lower stock price – for incremental capital near term. We shorted W at $270, but it remains a high conviction short at $47. This stock should be cut in half at a minimum.
Marine Max (HZO) and OneWater Marine (ONEW) | Moving higher short side ahead of HZO’s earnings this week. Simply put, we’re expecting to see an initial crack in the core boat/yacht retail business out of HZO. The company will likely be talking up the benefits of its two recent acquisitions, but we think both stocks will trade down on any negative datapoint around core high-end boat demand, which should become apparent this quarter. HZO is +22% since Oct, while ONEW is up a more tepid 8%. The biggest pushback we get here is that these stocks look supremely cheap at 4-5x earnings. Aside from our view that these businesses were built to sustain extraordinarily low multiples in perpetuity, they’re both over-earning by a factor of 3-4x. When the boat cycle turns, it turns fast. Both names are Best Idea Shorts.
