The Retail Show We'll be hosting "The Retail Show" every Monday morning (this week on Tuesday morning) to discuss rationale behind all of our weekend Position Monitor changes (usually around 10 ticker callouts), as well as give our roadmap for relevant earnings reports and data points for the week ahead. Please join us tomorrow at 10am ET.
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Pool Corporation (POOL) | Elevating to Best Idea Short. Risk/reward skews dramatically to the downside. Best Idea Short Pool Corp (POOL) missed the quarter last week, putting up $1.79 vs the Street at $1.98. Largely a top line miss, which we were banking on. But the stock traded up on guidance, which we think is a pipe dream. Base business net sales up only 1%, including 8% benefit from passing through inflationary cost pressure (on top of 10% inflation this time last year – so we’re looking at a 2-year 18% inflationary growth stack). EBIT declined 16% despite the revenue growth, as margins took a meaningful hit. All in, with this miss, the company should have guided down – even if it thinks it could hit higher numbers. Now it faces multiple compression on ‘hope’ that it could hit 2023 numbers. We’d press this one here. At $377, this name is trading at a peaky 24x pe on what we think are undoable Street numbers, and the company’s comments/plans about the pool renovation market this year are materially more optimistic than suppliers and competitors. If our model is right, this stock could fall below $250. To read our full note CLICK HERE.
Crocs (CROX) | Taking higher on Best Idea Short list. The stock rallied hard on last week’s beat – but revenue only beat by 1% while EPS beat by 17%. But revenue only beat by 1%, while EPS beat by 17%.That reinforces our chief concern with this name – that the company is flowing through too much of the top line through to the EBIT margin line, and is not investing enough in SG&A to sustain top line growth on a go-forward basis. We just have a really hard time with a footwear brand (which have very extended cycles compared to apparel) pushing a 30% margin when the top line is generally slowing. To be fair, the company guided 1Q margins to be lower – 24-25%, which we like to see, and gives us ammo to backstop a higher top line growth rate in 2023 and 2024. But we suspect that the company is sandbagging the margin line, which still keeps us concerned about a slowing top line. Overall, the innards of this print were not good. Of the $0.40 beat, $0.50 came from SG&A. They now say they have too much inventory at Hey Dude (the company laps the acquisition this week) and there a TON of add backs here. Very sloppy accounting. They are at $2.7B in sales in Crocs but say they’re getting to $5B by 2026…yet N.A will “grow” which means likely 1%....So how can they get there if N.A is now tapped and then they have to lap massive growth internationally? Lastly, how can people be happy w/ GM in Q4 when DTC was +18% and Wholesale -25%? The mix of those should be a huge tailwind to GM. Shows how promotional they were to get to that sales growth. Overall, margins are peaky here, and we worry about the sustainability of top line in the core. The multiple sits at about 12x earnings, which might be cheap for a footwear brand, but keep in mind CROX traded as low as 4.3x earnings just last year. Given our concerns about growth slowing and margins coming down, 11x-12x is about as high as we’d give CROX – and that’s testing the high end of our comfort zone. We’re staying short this name, and would press it in the $130s.
Best Idea Short Canadian Tire (CTC.A-CN) – Best Idea Short – taking higher to Best Idea Short list as it set up for a series of guide downs. Put up EPS of 9.34CAD vs Street 7.46CAD and revenues of 5.34bn CAD vs the Street of 5.18bn CAD. Revenue growth for the quarter was up 4% YY but decelerated from prior quarter up 8%. The 25% EPS beat came both from the topline beat of approx. 4% and margin beat of approx. 140bps. Retail revenue was up slightly over 3%, ahead of our estimate of down almost 3%, and credit revenue slowed to only 4% growth, below our estimate of approx. 12%. That part of the model is definitely starting to crack. Inventory for the period was +30%. In the release the company said it plans to repurchase 5.1mm shares between March of 2023 and March of 2024, which is approx. 10% of the float. While the deceleration didn’t occur as early as we expected, it is slowing and we expect to continue to see a further slowdown in cycle-high sales productivity at the core Canadian Tire concept, with the credit book cracking on the margin. We’re definitely staying short this name as we expect to see a series of downward earnings revisions throughout this year. To read our full note on the print CLICK HERE.
The RealReal (REAL) | New CEO Taking Action, Upping on Best Idea Long list. RealReal announcing a 7% workforce cut and other cost cutting measures. In fairness, it’s probably not doing this from a position of strength. But it’s the first move by the new CEO to rightsize this business, which we like. As a reminder, 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 (less so with these cost cuts), 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 think 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 $1.70. 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. But definitely upping long side in the interim.
Home Depot (HD) | Print Early Tuesday. We’re coming out about a dime below the street, but ultimately think the company will be relatively inline but with slowing trends in the business. The most important part of the print will be what the company says around forward demand expectations. Transactions have been in decline (and looks to continue to be in our visits data), but ticket increases have been keeping comps positive. We think there is risk of continued downward pressure in spending in key home categories that HD serves, as we outlined in our presentation last week Home Retail Scenario Analysis Call (Video Replay Link CLICK HERE). The building products companies have sounded much more bearish than the big home improvement retailers to date. We’ll see if the HD takes down expectations as we think it should, as we’re coming up with earnings numbers about 20% below the street over the next couple of years. If our housing scenario base case for the next couple years is correct, we think this stock could got down to $200 vs current $318.
Floor & Décor (FND) | Reports Thursday after the close. Much like HD, we think the market and consensus expectations aren’t reflecting the demand reversion risk around the home space over the coming 18 months. EPS expectations for 2023 have quietly marched down from $3.35 at the end of October, to $2.88 currently. Meanwhile the stock has marched up about $20 putting the PE multiple back up around 32x. We’re coming in a couple pennies ahead for this Q, but think expectations for 2023 are still at least 10% too high, and a guide down like that is certainly not in the stock. Given the nature of the business being so tied to home turnover and/or tapping home equity for reinvestment, the category FND operates in could see demand down significantly as the project backlog dries up and there is little new demand to fill it. FND is a name we want to get behind if the expectations are reduced, the multiple comes in, and the home retail market shows signs of stabilized demand trends. This is a good business model with unit growth and a strong competitive position, we just think there is too much risk to numbers in 2023 to consider buying here, and see 30% to 50% downside risk on the short.
Etsy Inc (ETSY) Reports Wednesday after the close. We’re coming in about inline on EBITDA, as we think GMS/revenue is inline to slightly weak, but the company makes up for it on the cost line for slightly higher than street margin results. The more important piece of info will be guidance, as we think demand trends so far in the Q will warrant a guide down of GMS and revenue. US ecommerce results slowed moderately in 4Q22, but less than expected, as evidence by the AMZN revenue performance. But January’s result in the census data last week showed a big 1 and 2 year slowdown. The online interest trends (below) for ETSY look directionally bearish as well. ETSY continues to have elevated churn levels, while finding new and re-engaging old customers in recent quarters, but as the consumer tightens spending in discretionary categories which make up the majority of ETSY GMS, new customers will be harder to find and win meaning we’ll see the churn lead to customer declines. Growth will become more expensive and the company laps its seller fee increase in April, applying further pressure to revenue growth. EBITDA in the coming Qs is somewhere between moderately down and barely growing yet the yet the stock is carrying a 23x EBITDA multiple like its growing rapidly. Meanwhile AMZN is trading at 12.5x EBITDA. ETSY looks to have been a beneficiary of rotation out of some of the big tech names last fall, and we think it will lose as those names again gain favor by 2H23. As investors digest the business trends we think the market will value the company lower on the weak 6 to 12 month growth profile. We’d put a fair price range on ETSY today at around $50 to $75 vs current $130. Best Idea Short.
Gildan Activewear (GIL) | Reports Wednesday before the open. We upped this on our Short Bias list a week ago. The data points out of low priced basic apparel continue to be very ugly. HBI a couple weeks back guided down 2023 earnings by over 60% with gross margin pressure from clearing high cost inventory being a core catalyst. PLCE preannounced 4Q earnings to be a loss of ~$4.40 while consensus was expecting around 50 cents in earnings. Again, clearing inventory in the face of rising cotton/materials costs was a big driver of the massive miss. GIL is a better company with a better competitive moat than the others mentioned, but it is not immune to the margin risk around rising input costs, slowing demand, and excess inventory. GIL inventories were up 53% last Q. Demand is slowing with excess inventories out in the channel, so we’ll likely see reduced orders from the screen-print distributors. On the retail channel side, news hit recently that Walmart is pushing back hard on vendors saying they better have very good reasons to try to implement price increases. WMT is looking out for the consumer instead of worrying about vendors that have margins widely above pre-pandemic, and also listening to a Fed that says it is keeping an eye on elevated retail margins. GIL is trading below it’s ‘normal’ PE at 9x, but earnings expectations are too high, and in the last recession this got a low as 7x. We think GIL has downside risk into the low 20s on a negative earnings print vs current $30.
Wolverine Worldwide (WWW – Long) | Earnings out on Thursday. To be clear, this is not a brand momentum story, so we’re not looking for the company to blow the doors off the top line. But we think that the company is being much more selective in product distribution, hence should surprise on the upside in margins. 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 under 10x earnings (was at 7x when we went long), 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 $15.80 today. Over a TAIL duration, we get to something in the high $40s. Ultimately, we think this is a TAIL triple. This name is a definite Best Idea candidate – 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 (RVLV) Short into earnings on Thursday. The stock is up 32% since November, and it’s no secret that the credit card data shows that sales are above the guide. But remember, credit card data says nothing about margins, and we think that RVLV has been especially promotional this quarter to move product. Mind you, it’s building a DC just to house excess inventory, which it plans to pack away and resell at this time next year, which is diametrically opposed to the high-end fast fashion model that once made it special, when it ran shallow buys across a limited number of SKUs. It’s basically turning into a cross between an online department store and Stitch Fix – neither are part of an aspirational peer group. We think inventories end the quarter heavy, margins miss, and more likely than not, the company will take down guidance. At 30x the consensus earnings number (which is too high) we remain convicted in RVLV as a Best Idea Short.
TJX, Inc (TJX) | Earnings Wednesday. While this is a Best Idea Long Idea, we got on the name at $62 and its now pushing $80. It’s turning into a high expectations stock due to all the excess inventory in can buy on the cheap, pack away, and sell next year. But a) next year is a long time to wait, and b) in the meantime TJX is competing with the other retailers offering steep discounts to clear winter inventory. We can still build to $5 in EPS power over a TAIL duration, and a $125 stock. Not bad for a stable, low beta name like TJX. But we wouldn’t be heavy into this quarter, and would rather buy it back closer to $70 on either a squirrely quarter and/or a pull back in the group come April/May timeframe, which we expect to be a tough retail tape across the board.
Driven Brands (DRVN) | Reports Wednesday before the open. DRVN is a Best Idea Long as we think the company will come in well ahead of its long term EBITDA target of $850mm and achieving the target level a couple years early. It has some of the best unit and comp growth in consumer blending organic performance and strategic M&A. It’s car wash business saw some pressure in the middle part of 2022, but the other businesses of maintenance picked up the slack. We like the diverse model operating in several parts of auto maintenance services, which is also a good place to be in times of Macro pressure given the necessity of maintaining a car and consumer shift towards extending a current vehicles life vs replacing it. The company has been buying businesses in auto glass repair to add another segment of important auto service to its portfolio. Visit trends at key businesses in the DRVN maintenance segment (Meineke and Take 5) look to have improved since late fall. We think we’ll see similar results out of DRVN this Q that we have seen from other auto aftermarket companies. That is strong revenue trends and outlook with some give back on SG&A given the tight labor market in its segment of consumer service. This remains a Best Idea long and a stock with the potential to double over a TAIL duration, though currently in the auto maintenance space we have a slight preference to VVV over the near term given its upcoming business separation catalyst. 
Wayfair (W) | Thursday’s quarter should be a push. Revenue is likely to come in weaker – fuel for the bears – given all the costs the company is pulling out of its system. But cost cuts will be the main highlight of the call, as the company is cutting everything (and everyone) not nailed down to prevent a major liquidity event. The stock has been extremely volatile this quarter, troughing out at $32, more than doubling to $74, and now settling in around the low $50s. If the company was smart, it would have been on the road pricing an equity offering with the stock in the $70s. But that ship has sailed. We still think we’re likely to do a deal – a large one – at a lower price. To stay intellectually honest with our thesis, we’d have to revisit our short thesis on an equity deal, as it might take bankruptcy off the table. We’ve been short this name since $270, and fundamentally see zero on the horizon to get this stock moving again aside from a market-driven short squeeze. We like it down to $20-$30 from current levels, but think that the company will have it’s ‘cut costs to save the business’ selling hat on this quarter which will mitigate downside. To be clear, cutting costs when times are tough is VERY bearish for top line trends, and we expect Wayfair’s promotional cadence to pick up and share loss to intensify. We’re just not sure this quarter is the one that makes it crack.
