We’re hosting our weekly “The Retail Show” tomorrow, Monday at 11am. We’ll ‘speed date’ through our Position Monitor changes, upcoming earnings for the week, and any other questions that viewers (including you) put into the queue.
The Retail Show Live Video Link CLICK HERE
Wayfair (W) | Moving from Best Idea Short to Short Bias list. We’ve had this as a Best Idea Short since late 2020 with the stock at $275, and after fighting several senseless rallies and near term squeezes, we’re moving this off the Best Ideas list after the collapse post earnings. We don’t think this short is truly done, as the management team has a real problem with the balance sheet. We don’t think this company will ever deliver sustainable profits while growing the topline, but the company is going to do whatever it can this year to put up a ‘breakeven’ quarter and convince the market it can make money. We think that means another rally is coming for the stock. An equity deal is arguably in the works on such a rally, so we’ll be ready to re-short this should we get that pop. We’re not about to say be long this one any time soon, but we’re definitely risk managing the short given its big (and fast) correction, recent volatility and short interest near 40%. For our note from after earnings see W | Do You Believe?.
Nordstrom (JWN) | Moving Lower on Best Idea Short List. This stock has given up virtually of its gains on the Cohen activism announcement, when it peaked at $27. To be clear, we think that campaign will fail. The Nordstrom family will be very tough to uproot given that they control 70% of the Board, and our sense is that Cohen is not up for the proxy fight. He’s got enough on his plate with GME, which is showing very few signs of progress in its turnaround. We still think that the Nordstrom assets are impaired. Different people managing the business not likely to help. Losing share in virtually every segment. Mind you, Saks was out last week saying that “the aberrational gains of the past few years are waning” and we think that speaks to JWN’s core customer. We think this business is slowing, and don’t like the fact that $1.60 of its $1.65 in earnings this year comes from credit card income. This is the next shoe to drop. We still like this name short side, but are taking it down a few notches on our list given the scant likelihood of a successful activist campaign, offset by the unlikely positive turn in its business (in fact, we’re likely to see the opposite), and credit card income risk. This should trade at about 6x earnings (a credit multiple), which gets us to about a $10 stock vs its current $19.
TJX Inc (TJX) | Taking lower on our Best Idea Long list. We went long this stock at ~$62 on the theme that it would be the primary beneficiary from the excess apparel inventories in the pipe. With the stock now pushing $80 – we didn’t like the fact that inventories were DOWN 2.4% in the quarter reported last week. We think the company should be more aggressive in using its balance sheet as an offensive weapon to buy up inventories today, and pack away to sell and gain share in another 9 months. Maybe it’s just playing hardball with the vendors – waiting for prices to come down even further – which is a definite possibility. But we viewed the decline in inventories as a bearish datapoint on the print and are taking it to the bottom of our Best Idea Long list accordingly. Can you still ‘dream the dream’ and get to $5 in EPS power over a TAIL duration? Yes. But the company needs the product to drive an outsized comp. We’re sticking with this one, as that scenario gets us to about a $125 stock. But we’re respecting the datapoint for what it is, and are taking this name down a few notches.
HD and LOW | Taking Higher on Best Idea Short list. We were on the right side of the HD print with our short call, and were pummeled by questions about “so now do I cover?” We think the opposite. This was a strong point of confirmation of our thesis that we outlined in our Home Scenario Analysis (Replay Video Link CLICK HERE) two weeks ago. Both HD and LOW might be Macro aware, but their GDP forecasts and share gain assumptions are simply too optimistic. HD numbers did not come down by nearly enough, and we suspect the same will hold true for LOW on Tues. This is going to be a drawn out decline in spending on the home, and our work shows that home turnover by far trumps what people spend on their homes when they stay in their existing homes. This comp decline at HD and LOW is likely to outlive our Quad 4 call – by at least a few quarters. There’s both earnings and multiple risk at both names, and both are moving higher on our Best Idea Short list. People are looking to buy/cover the negative headlines – but there’s far more bad news to come – along with 30-40% downside in the stocks.
Valvoline (VVV) and Driven Brands (DRVN) Both Moving Higher On Best Idea Long List.
- DRVN put up a Relatively Inline Print, But Story Remains Bullish. Comps ahead, EBITDA slightly ahead. Management guiding to revenue and EBITDA slightly ahead of the consensus for 2023. Comps in total up 11% but carwashes proving to be much more discretionary down 10%, while maintenance and paint/auto/glass were up mid-teens. So the diverse nature of the business segment showing their strength. Maintenance performing well in the face of car wash weakness. We like DRVN long side, as we think EBITDA estimates over a tail duration are very beatable, and we like the non-discretionary aspects of the auto maintenance segment especially here in macro Quad4.
- We like Long VVV more as it has the upcoming separation catalyst, which we think will take place within 2-3 months. This gives us Valvoline Instant Oil Change (VIOC) as a standalone entity, which we think is one of the best growing and most defendable assets in retail. Green field and franchise growth, strong dd comps, strong four wall economics, a loyal customer, no Amazon competition, and a big change in sentiment coming down the pike as the ‘right’ analysts on the sell side and buy side start to cover the name. We think this should get a 20+ EBITDA multiple on above consensus EBITDA, which we think is good for a stock in the ~$50 range vs its current $35. A very ‘Quad 4 resistant’ stock.
Target (TGT) | Reports earnings Tuesday before the open. WMT’s print was telling for TGT, as it highlighted discretionary category weakness and margin pressure from promoting discretionary products. So even in cutting price to help manage inventories, WMT has weak discretionary demand. That doesn’t read well for TGT that is much more discretionary than WMT. Inventory at WMT was much cleaner than in prior quarters, and it wouldn’t surprise us to see a sequential improvement for TGT as well. Since we went short this name 2023 earnings have gone from $12.20 to $9.18 and we think there is another guide down to come as we’re coming in around $8.50. Brian Cornell won’t want another year of consistent misses and profit warnings, we expect management to set a beatable bar. At the same time the bulls are looking at the expense savings signal that the company talked about last Q of $2 to $3bn in gross cost cut potential. There could certainly be some fat to cut after the pandemic demand boom, but this number to us is clearly a gross savings number to offset other investments, so the true tailwind is much less. Meanwhile, wage inflation for non-supervisory employees continues, and the company recently announced increased investment in next day delivery capabilities. We think comps see pressure in 2023 and SG&A deleverages. Fair price range on our earnings is $100 to $130 vs current $167.
Acushnet (GOLF) | Short on Wednesday’s Earnings Report. The near term bull narrative is around the release of the Netflix Full Swing documentary about the PGA Tour. There is perhaps a moderate uptick in product interest on google, specifically balls, happening concurrently with the release. Outside of an Adidas apparel moment with Colin Morikawa, there was no product featured on the documentary. And ultimately the documentary is about the tour and the drama of the competition, there wasn’t much to get non-golfers to think the game is fun… in fact one of the episodes is entitled ‘Golf Is Hard’. So the outcomes we expect to see are elevated tour viewership, maybe core golfers itching to get out there (hence the ball demand), and perhaps the inspiration of a bunch of already playing youth golfers to dedicate themselves to improving their games. Outside of some near term ball demand bump, we don’t think there is any positive element for GOLF. The GOLF customer is core golfers, not the marginal one, and core golfers replaced their equipment at elevated levels over the last few years, and are coming off of all time highs in rounds played. Meanwhile, the macro environment is deteriorating and consumers won’t be spending as much on these high ticket goods. As a side note, on the golf participation side the NGF reported a net gain in 2023 for on course participants of 500k golfers on a base of 25.1mm (+2%). The narrative the last couple years was around all the new players coming to golf since the start of Covid, yet per the NGF data, golf participation over the last 3 years is up just 5% total. About a quarter of that came from youth golfers (6-17yo), who don’t buy top of the line Titleist clubs, and who tend to have the highest churn related to continued participation. We’re short GOLF as we think the golf industry will be facing a big drop in equipment consumption over the next 12 months. FX has also reverted back to a trending headwind in recent weeks. We’re at $280mm in EBITDA vs the street at $341 in 2023. We’re not giving it more than an 8-10x EBITDA multiple, or 30% to 50% downside.
Best Buy (BBY) | Reports earnings Thursday before the open. We remain Short BBY as we expect continued unit consumption pressure on consumer electronics and appliances. These long-lived products were over consumed during the pandemic and as the consumer continues to weaken and reduce discretionary spend, BBY comp will see significant pressure. Margin expectations have gotten back to pre-covid levels, but they are still far from recessionary levels, which is where we think we are heading in this category. WMT and AMZN said they are seeing weakness in electronics, and even with reduced prices, TGT will give a read ahead of BBY’s earnings as well. Visit trends are negative YY even with the lapping of omicron… in December visits trend got to ~30% below 2019 levels. Online interest trends show worse declines in 2023. The multi-year compares we are about to hit are very hard, and the consumer data continues to deteriorate. Wage pressure continues to create deleverage risk, and secular pressures around gross margin remain from elevated online penetration and lower warranty/credit attachment. We think 2023 EPS needs to come down another 10 to 20%, and the stock is trading at 12.5x that too high consensus number. This stock could easily revisit the low 60s vs current $84 or ~30% downside.
Gildan Activewear (GIL) Moving to bottom of Short Bias list. This had been creeping up our short list around rising costs and bloated apparel inventories. But the company had some bullish comments on the last earnings call, and the market seems to think the earnings bottom is in. We don’t want to over stay our welcome short side on a name when we actually want to own it longer term, as it is a good company and a good business with secular growth tailwinds and a highly profitable operation. The specific comments that read bullish were around the company leveraging recently returning capacity to win new business programs in global brands and private label (though without giving the specific details) and that the company will invest more in inventory leveraging its balance sheet strength to try to win share vs competitors that have too much leverage or limited balance sheet room to invest in working capital. Applying pressure on competitors is definitely a winning strategy in a tough macro environment for Gildan. We will note that inventories are up at GIL, but are only slightly ahead of revenues when compared to 2019, so GIL was overly lean due to supply chain constraints, and now it’s only slightly inventory heavy. The apparel channel remains over inventoried, but GIL doesn’t have clearance risk like others do, basic colors of basic tees are ok to hold onto until demand returns. An odd comment from management was that its new international facility in Bangladesh won’t pressure margins on opening. This is a capacity and utilization business, so that didn’t quite make sense to us, but perhaps it’s just small relative to some of the offsets they have. We’re not quite ready to go long this name, as with management might be underestimating the demand risk near term, and we’d like to see more clarity or results on the new program wins. But we’re coming up with EPS of $2.86 vs street at $3.07, barely below and 1H expectations look doable even with demand risk. If we’re at or near the bottom in earnings risk, given the cash generation/return profile we’re not sure this should trade much below 10x suggesting we have less than 20% downside over a short period of time, and long term we think you have potential for $5+ in EPS and a stock 50% to 100% higher.
AZO and AAP report earnings this week on Tuesday. We don’t have a call currently on either of these, though in the space we favor ORLY and AZO, and don’t like AAP as we were recently short it from ~$200 in summer to ~$140 around Christmas. We like the longer term setup for Auto Parts with good demand drivers around the aging car parc, but near term with think there is some consumption and trade down risk from the inflationary pressures on the consumer. The ones we’d want to own (ORLY and AZO) have high expectations, peaky margins, and peaky multiples. AAP is showing how the weak executors perform in tougher environments (poorly). These are historically good Quad4 performers, but we think the better place Long side right now is in the auto maintenance names (VVV, DRVN).
InterParfums (IPAR), Best Idea Short, reporting Tuesday. Last quarter the company beat, still riding the reopening wave of beauty, but did not see outsized growth compared to the fragrance category as a whole which put up 11% growth in Q3 of 2022 and IPAR only put up 6.8%. This company is all about licensing deals. While some of the deals are with more elite brands like Moncler and Van Cleef and Arpels, the majority of the licensing is done with brands like Abercrombie and Fitch and Guess… not exactly what we think about when we think of top of the line fragrances. Our main issue with this company isn’t where it operates in the fragrance tiers, it's that it relies on licensing. The reliance on third parties for intellectual property provides little terminal value. Much like the rest of beauty has been doing for the last few years, IPAR is over earning. Putting up high teens EBIT margin, when pre-pandemic is operated at about 13-15% margins just isn’t sustainable. We’re modeling mean reversion over a TAIL duration in margins. Currently trading at 31x PE on Street numbers (which we think are too high), when it should be at a mid to high teens multiple on the right numbers. This company is over earning and is overpriced, and is likely to give up 30-40% as the category mean-reverts.
