Crocs (CROX) | New Best Idea Short. We usually start off with new positions on our Bias list and work up from there – but this one is going right to Best Idea Short Status. We went Short CROX initially at ~$120 a year ago in January, and rode it down to $75 when we covered in March. We were a bit early in covering, as the stock subsequently went all the way down to $48. But the stock has since ripped – up 150% off the lows and is back over $120. We don’t get it. The fundamentals aren’t matching up with the price rip. North America growth in the core Crocs brand is slowing, Hey Dude has been on fire, but we think will slow in 2023, and most importantly, this company is pushing a 30% operating margin. There’s no way a footwear brand should be putting up that kind of margin, especially with growth slowing in its two brands. To its credit, it’s investing more in Hey Dude (which it acquired last year and is on track to be a $1bn brand in ’23) but the 40% margin we’re seeing there will come down by at least 1,000bps. It’s tough to call footwear cycles (as it relates to the core Crocs brand) but this brand, we think, is in the latter innings of a multi-year rip in growth and profitability. The company sold 110mm pairs of Crocs over the past year, which is a simply staggering number. We can’t see it getting to 130mm, which is what you have to believe to own this stock. The Street has revenue going from $3.5bn in this year to $5.8bn over a TAIL duration, with virtually no margin degradation. We think you’ve got to pick one or the other. After earnings ~$2 per share pre pandemic, we’re looking at ~$10ps in earnings this year. We’re giving the company the benefit of the doubt on the operating margin line, but are dinging the model on growth. Ultimately we’re coming in with a $10-$12ps earnings annuity while the Street is building to $17-$18 over a TAIL duration. If growth continues to slow, there’s no reason why we can’t see this stock trade at 5x earnings. It’s been there before (recently) and no reason it can’t get there again. That’s good for 50% downside, with the potential for earnings downside as a kicker.
The RealReal (REAL) | Moving Up To Best Idea Long List. The company announced a new CEO with relevant experience at Ebay and digital operations of various retailers including Neiman Marcus. We don’t have a great read on the new CEO yet, but certainly seems qualified to lead the turnaround based on his work/board experience. The business has real secular tailwinds as the resale market grows and becomes more accepted within the marginal consumer and upcoming generations. There are potential cyclical tailwinds as consignment models tend to do well in consumer recessions. In effect, this kind of a backwards way to ‘short the rich’ via a pickup in the wealthy selling more high end luxury bags, accessories, jewelry and apparel in the current downturn. The stock and debt are trading like there is a real bankruptcy concern – we don’t think it gets to that scenario (as we highlighted in out Bone, Bagger or Bust deck last year). It is burning some cash, but it also sits on about $300mm in cash as of last Q. The company is in the process of a transformation to shift the focus on profitability and profitable growth from the high growth unprofitable model it had been running post IPO. We think this company can get to profitability well before cash runs out if it is focusing on core customers and higher margin product segments while increasing authentication efficiency. The stock and valuation have been punished in this Quad4 market where small cap, unprofitability, and leverage have all been trading down. Though we’d note the EV here is actually much lower than it looks given where bonds are trading. Converts are trading around 47 cents on the dollar. So the real market EV pre-premium is ~$175mm. That’s ~0.1 EV/GMV and 0.3x EV/sales. That’s a very low price for a company we think has built up the most valuable assets needed in this retail segment, quality authenticators and a recognizable resale brand name. If we wanted to re-create this model, it would cost much more than the current implied EV. We the assets here are definitely worth something, and it should be eventually a target for a luxury brand house (LVMH, KER), but perhaps for PE firms step in to unlock the value in the interim. In a deal with think the equity is worth between $5 and $10 per share vs current $1.75. The downside risk is that the company is getting rid of product that sells for under $150, and is focusing on the high end. That could give GMV growth a hit in the coming quarter (though margins would likely be better), and in the event of a sell-off we’d get heavier in the name. We’ve had this name on our Long Bias list for over a year, and have been wrong, but with greater conviction on the management change, recessionary trade-down effect, likelihood of a take out, and significant discount to replacement value, we’re getting incrementally bullish.
Adding VF Corp (VFC) Short Side – Likely Dividend Cut Coming. There’s literally nothing positive to say about the trajectory of this company’s portfolio today. That might be apparent in the stock, having fallen 50% over the past year. But this is a company that over the years has gone from Great, to Good, to Below average. Its multiple, which currently stands at 13x (closer to 15x on real number), is simply too high. Its key brands like Vans, Timberland, The North Face and (recent failed acquisition) Supreme are all declining, with little hope for a timely turnaround. The problem, aside from management, and having to invest considerably more in R&D and marketing to reignite brand heat across the marginal portfolio, is the balance sheet. VFC has $6bn in debt – excluding another $1bn in leases – and is still paying a $775mm dividend with the company pushing 4x leverage. When we look at the company’s cash requirements – the most notable of which is higher capex, accrued legal/tax payments, and most importantly $3bn in debt that comes due over 3-years (split evenly between ’23 and ’25) there’s simply no way that the Board can justify keeping this name at a 6% yield. Do we think the dividend get eliminated entirely? No. It likely gets cut in half. But on continued top line slowdown, margins going the wrong way, and a dividend cut, we think there’s no way this stock holds a 13x multiple. People might point to where it used to trade – as high as 25x earnings in yester-year. But that’s completely irrelevant, as this is a sub-par company now that has several negative catalysts on the horizon. Stocks don’t go up when dividends get cut I half while missing numbers. We missed the 50% slide over the past year. But that doesn’t mean that there’s not another 30-40% downside to come from here.
Amazon (AMZN) Earnings Thursday. We’re cautious on the Q for AMZN as we think revenue is likely to meet or beat expectations, but cost pressures remain a concern as of 4Q. 4Q US Non store retail slowed 300bps on a seasonally adjusted basis, that is noticeably less than the NA revenue slowdown that looks to be implied by total top line guidance. Last Q management sounded slightly on the defensive on the call, a rare occurrence for AMZN. Though that could be because the CFO is the main voice on the call, and there is a cost management problem for Amazon relative to demand trends. The CFO was clear that they have work to do on getting the cost structure under control, though it didn’t sound like major cost cuts are in the plan for 4Q, rather accelerating in early 2023, which looks to have been the case given the news flow and company comments on profitability initiatives. We have seen several announcements... multiple series of headcount reductions, Music Unlimited price increase, discontinuation of AmazonSmile, new food delivery charges, leasing cargo plane space, and more. These cost reductions are both good and bad. Good because it should improve profitability. Bad because it is sending a very negative read over AMZN's internal view of growth potential over the next couple years. Investments in AWS remain high, which could be margin bearish as we suspect the corporate headcount cuts in recent weeks suggest that companies are looking to save money, and as AMZN has already communicated it is working with AWS customers looking to save some money. AWS is likely remaining aggressive on pricing to protect/gain share in the slowing market environment. So we expect to see revenue and profit trends slow for AWS. All in it doesn’t make for an overly bullish setup as we think about the TREND model for AMZN… we don’t think you have an opportunity for sustained acceleration in revenue and gross profits (the conditions we look for on TREND duration to be outsized long AMZN) until after we lap Prime Day in mid-summer. TAIL setup here remains net bullish, but TREND remains net bearish.
Decker’s Outdoor (DECK) | DECK is reporting this week. We’re concerned about a conservative guide – not financial performance. We expect a top and bottom-line revenue beat; revenue growth of approx. 18% and EPS coming in approx. $0.30 higher than guidance. HOKA has been upping its apparel and sneaker game to be more appealing for lifestyle and not just performance based and has been steadily broadening its wholesale distribution. During the holidays you couldn’t order a pair of UGGs without them being backordered. We’ve said it before and will say it again, but this is one of the top management teams in the footwear space (second only to Nike), and think that they’re taking a page out of the (extremely successful) Ugg product-tiering playbook and are applying it to Hoka (unlike ONON, which we think will blow up due to over-distribution). Our only concern here is that DECK is a perennially conservative guider. The team is very macro-aware, and the likelihood of the company flowing the 3Q beat (FY Ends March) through to the full year is low. Given that it’s rallied by ~50% since we added to our Best Idea List – and +22% since Nov – we’re looking to add more on conservative messaging as opposed to loading up into the print. Despite what we think will be a solid print, we think this this is one where you want to protect yourself on the event.
