We’re hosting a presentation tomorrow, Monday February 6th at 11am ET to review all of our position monitor changes for the week, as well as changes/nuances around how we’d be positioned into earnings this week. To join the call, click the following link.
Live Video Link CLICK HERE
RH | Best Idea Long – the Negative Headline has more bark than bite. On Friday after the close, the company disclosed in an 8K that ‘Financial Statements for the first three quarters should no longer be trusted.’ My (McGough) jaw dropped when I saw that one…the fact that the company would wait until after the close on a Friday is a particularly bad look. Not to mention it happened weeks after the CFO sold $3mm in stock. Those are the facts. Again, bad optics here. But the reality is that the above the line operating results as reported are accurate. No changes to the growth and margin profile. This has to do with errors in the reported EPS in response to an SEC letter questioning accounting surrounding add backs and tax rate associated with the convert. The company also noted that 4Q sales came in at the bottom of the range, and margins came in at the top of the range – which is not a surprise to us. This stock is up 45% since the Nov low, vs 11% for the S&P. It’s been a star performer. The company also disclosed that it repurchased $1 billion in shares since June, implying that it has been buying above its initial price of $255 when the repo began. It still has ~$1.4bn left in its authorization, and once its window reopens it will likely be back in the market aggressively. We’re BIG believers in the RH story, and think this is well over a $1,500 stock over a TAIL duration – and think the next catalyst is ‘proof of concept’ that the model works in Europe, which should be by this summer with the opening of RH England. Consensus estimates are already down to ~$17 over the next FY, down over 40% vs last year. We think that’s trough. This company has been telegraphing the recession since almost a year ago, and was the first to trade down into the housing market malaise. Consequently, we think it will be one of the first names to climb out once we’re out of Macro Quad 4 in the summer. We’re not happy to see the accounting issue. But it has zero impact on our fundamental conviction around where this business model is ultimately headed. Best Idea Long.
Chewy (CHWY) and Overstock (OSTK) | Losing near-term conviction – Taking lower on Long list. Ecomm fundamentally losing momentum.
- CHWY is up 40% since November on mediocre trends, and we’re seeing Google interest trending negative for the first time in years. We’re still believers in the long term model here, but don’t like the comparison setup for the next two quarters, with risk to YY customer growth stalling out. Taking this one to our Long Bias list from Best Idea Long list. We rather be buyers on what we still think will be a broad retail sell-off in 1H at a price below its current $48 – we’d get more aggressive with the name starting with a $3-handle on a weak quarter.
- OSTK has hardly been a star performer, and it is likely a long term winner in the face of the BBBY bankruptcy and other leveraged home retailers on the ropes (Video Replay Link to our deck from last week CLICK HERE), but the reality is that it first has to get through the negative implications of clearance activity as BBBY liquidates and pressures the category, which is on top of negative trends in the Home category overall. We still like this name a lot as a pair against Wayfair short side, which has ripped 109% off the November bottom, and we think needs to do a massively dilutive equity deal right now to shore up its balance sheet. But until BBBY clearance activity subsides, which could be 2-3 quarters, we think we have time on OSTK. Lowering it on our Long Bias list.
Kohl’s (KSS) | The call that we DIDN’T make this week. We were all set to add KSS back as a short after covering this name at $27 – it’s since traded back up to $35 when we think fundamentals are eroding for its core consumer. But two factors gave us pause. The first is the recent spike we saw in KSS traffic. See chart below. Definitely notable. The second is that we’re in the final stages in updating our analysis on ULTA stores vs the KSS stores opening in its territory (which covers about 80% of ULTA locations) with new Sephora shops. This could be a longer-term game changer for KSS, and we’re going to wait to see where the data shakes out and will present our conclusions on Wednesday in a Flash Call on the topic.
Canada Goose (GOOS) | Press Best Idea Short positioning into the analyst meeting on Tuesday. We nailed the print on Thursday, which was absolutely a horrible fundamental event for GOOS and validated every part of our thesis. The company is going to come out all guns blazing with a 5-year plan – but we think the meat behind the plan will leave people lacking and wanting. It’s not going to set FY24 guidance – but rather focus people on an unquantifiable 5-year ‘dream the dream’ goal. Mind you that this is one of the worst management teams in retail, with horrible forecast accuracy. We think the real long-term earnings power here is well below C$1.00, despite what management says about its future. The stock bounced on Friday after getting shellacked on the Thursday print. And we think that people covered on the bad event and don’t want to be long into the analyst day. We’re comfortable being there. We think this will be the year where wholesalers materially cut orders, push back on selling non-parka merchandise, and in some cases, cut off the brand. It’s past its prime, inventories are pushing $2.4bn retail value on its balance sheet (ugly SIGMA chart – see below), and the hope for a rebound in wholesale and DTC is just that – a hope. We don’t do ‘hope’. If we’re right on the model, this stock is ultimately headed well below $10 vs $21 today. 
Ollie’s Bargain Outlets (OLLI) | Removing OLLI From Long List. We went Long OLLI in April with stock around $51. Our thesis was that it had the one of the best TREND fundamental setups in retail with easy compares on revenue and margins while most of retail had challenging compares. It also had a business where excess inventory was presenting an opportunity to improve its value proposition to the consumer. Plus it has been a solid Quad4 market performer historically. The stock quickly rallied to above $70 in July, but continues to be making lower highs since. Its up about 10% from when we went long with the XRT down slightly. So overall alpha on this call, but we would have been wise to get off of it when the stock ripped in summer into our prior fair value range. The 3 quarters it has reported have been weak, mostly on top line misses as the middle to low income consumer that OLLI serves continues to be under pressure from inflation on necessities. OLLI is getting better buys, but right now every retailer is looking to clear out inventory, so the relative pricing for the customer is less compelling. We have concerns that comps will continue to underperform. Long term, we have never been believers in the company being able to hit its ambitious store targets without seeing deteriorating economics. We’re adjusting our earnings and valuation framework lower. Think you have TAIL earnings around $2.75 to $3.25 on the current rate of change view we are willing to give that a high teens to 20x multiple, suggesting the stock is fairly valued here in the high 50s. We could see ourselves being Short this name in the not too distant future if the stock is still up around $60 and the comparison setup gets harder such that we can argue rate of change slowdowns and multiple compression.
Valvoline (VVV) | Reports Tuesday. We’re expecting an inline Q. Fiscal 1Q (ended Dec) trends in visits look to be similar to last Q, and trends in January look to have accelerated. Pricing has been driving much of the comp growth in the quick service oil change segment. We expect to see comps around 8%, and EPS inline or slightly ahead of expectations (we’re a couple cents ahead of street’s $0.22). The more important catalyst for VVV is the impending separation with the sale of its Global Products business. The sale will generate ~$2.25bn in proceeds for the company to pay down debt and buy back stock. The remaining asset of Valvoline Instant Oil Change is one of the best growth assets in retail. HSD Comp Growth on HSD Unit Growth, and high 20s EBITDA margins. The company will be putting up mid 20s EPS growth with strong cash generation that can be used to drive growth and buy back stock. We have TAIL earnings power of $2.50+. When the separation is completed and the market gets to see how the model can grow, it will gain new investor attention, driving a stock is worth $40 to $50 near term, currently at $36. Long term this is a big compounder, Best Idea Long.
The Container Store (TCS) | Reports Tuesday. Cautious into this week’s TCS print. We’re modeling a beat for TCS’s fiscal 3Q, but we think the company will temper forward expectations. Visits trends looked slightly better in 3Q than in 2Q, though are still down low double digits YY. Trends in January look to have improved, though admittedly lots of retail looks stronger in Jan as we are lapping Omicron. TCS has easy gross margin compares as it laps raw materials pressure on its COGS. The home category we think remains under pressure over the coming 3 to 6 months. As we outlined in our BBBY Bankruptcy call last week (Video Replay Link CLICK HERE) TCS could be one of the biggest comp percentage gainers from BBBY’s demise. However, the liquidation of BBBY’s product, into an already slowing category, means there could be price/margin risk before we get to the share gain opportunity. So we’re bullish on the TAIL, this is a new unit growth story after years of not growing. It’s a category that is hard to shop easily online, and it’s one in store offerings and service can help with rapid and better solutions for customers. We are building to TAIL EPS Power of $2.50 to $3.50, but remain cautious around the TREND setup on category reversion and the industry promotional cadence. 
Capri (CPRI) and Tapestry (TPR) Earnings Out This Week. Long CPRI, Short TPR.
Best Idea Long, CPRI is reporting this week. Our EPS estimates are about $0.30 above the Street, with revenue growth of 11.6%. We expect Versace and Choo growth to be in the mid-teens and Kors growth to be in HSD. The growth of Versace and Choo over the last few quarters should continue to hold over the coming quarters. The handbag and accessories categories will be more resilient than clothing, as well as top tier brands will maintain and grow market share better than mid-tier brands, like TPR. We think that CPRI will temper guidance for the upcoming quarter – though we have yet to see promotions heat up versus last year in the Kors brand. We’re seeing very rational behavior our of Versace and Jimmy Choo, and expect to see meaningful yy margin improvement in both brands. Broken record here, but our TAIL call is that Versace and Choo will account for 50% of EBITDA over a TAIL duration, which should re-rate the stock to be closer to luxury peers – funded by ongoing mid-20s margins in the ‘cash cow’ Michael Kors brand. We think that’s good for a triple in the stock, even though the stock has already nearly tripled since our original Best Idea call. As a kicker, the Michael Kors brand just got a new CEO, though we hope he does not make any changes to operating the current plan – if its working – which it is – don’t change it.
While we expect TPRs (Short) 2Q23 report to come in-line this week, we expect a guide down for the rest of the year. Mid-tier luxury brands will be hit the hardest with the recession and the pull-back on spending these next few quarters. We like the Coach story, lowering its target customer age by about 20 years, and Stuart Weitzman putting up good product flow and good marketing campaigns, but SW is only 3% of sales, and we can’t get behind the Kate story. It has topped out at approx. a $1.5bn business for the last 5 years and keeps falling short of its $2bn target. Unlike with CPRI, this story rests entirely on the Coach brand (better than 90% of cash flow), and as well as its done we don’t like relying on a middle market brand to drive a sub-par portfolio – particularly in 1H23, which we think will be challenging for the space. We like the pair trade of long CPRI and short TPR.
