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
Columbia Sportswear (COLM) | New Short Idea. This name is in ‘stalled growth’ mode. It needs a serious boost to innovation in order to keep up with the intense competition we’re seeing in the cold-weather apparel market. It’s not as bad as VFC (with North Face). But it’s bad. The company is on track to earn $5.35 (if it hits estimates, which is debatable) for the third year running, and the consensus has EPS marching up to $7ps over a TAIL duration. We think that’s a pipe dream. This name trades at a 16.5x PE and at 10x EBITDA – both of which are too high for a name that can’t put up EBIT growth consistently. As a kicker, this winter was abysmal for outdoor gear, unfavorable weather on top of three years of overconsuming for outdoor gear. The cards are stacked against COLM right now. And we think we could see and 11-12x p/e on lower numbers, which gets us to a price closer to $65 vs its current $90.
Foot Locker (FL) | Taking off of our Short List. FL has been unusually controlled in its promotional efforts, despite being jammed with Nike Apparel inventory in order to get higher end kicks. To be clear on the ‘Nike and Foot Locker are mending’ narrative – we think it's flat out false. This is a transitory push from Nike to unload APPAREL inventory and is incentivizing FL by way to getting more limited edition Jordans and AF1s. But the thing that scares us about being short this name right now is that new CEO Mary Dillon – per her employment agreement – has to outline her long term plan to the Board and investment community in March of this year (ie now) in order to trigger her long-term incentive compensation. Dillon can sell, and people are likely to buy into it. To be clear, there’s nothing we think even the best CEO can do to grow this business. The company will be relying on smaller up and coming brands to a far greater extent over a TAIL duration, which are more profitable, but don’t drive traffic. Dillon is a growth CEO, and there’s noting growthy about FL in any way shape or form. But we can see the story-telling and bullish narrative getting people excited on the upcoming print, and we don’t want to be on the wrong side of that. We’ll likely revisit short side after the dust settles at a higher price.
Valvoline (VVV) | Taking Higher on Best Idea long list. The sale of the Global Products business was finalized and executed last week, and now you have just one entity Valvoline Instant Oil Change (VIOC) that will trade as a stand alone entity. We’re taking this to #3 on our Best Idea long list – ahead of Nike – which is a big deal for us. But the company is going to use the proceeds to buy back stock ($1.6bn authorization to be used within 18 months), and invest in accelerating growth in VIOC – which is one of the most defendable assets in retail from where we see it. Fairly recession resistant, share gainer from weak competition, superior service offering, greenfield unit growth as well as franchise opportunities, and to boot, is one of the only retailers that faces zero Amazon threat. We’re likely to see a change in coverage on the buy side and sell side now that this is purely VIOC (its currently classified as a diversified chemicals company, which is ridiculous). We think this name should get a mid-20s EBITDA multiple on numbers that are ahead of consensus over a TREND and TAIL duration. We think it’s good for a $50+ stock within 12-18 months ($37 today). A very safe Quad 4 stock, and one that should be putting up industry leading KPIs and P&L results as we exit Quad 4.
Canadian Tire (CTC.A-CN) | Taking higher on our Best Idea Short List – yet again. Our biggest concern here – aside from the productivity of the core concept up 30% vs pre-pandemic when the Canadian consumer is in worse shape than their US counterparts, is the risk to the credit book. We think the company is under-reserving for bad debt expense, and showed too much growth in its credit book in the latest quarter. We’re seeing US department stores like Kohl’s talk about mirroring trends in higher delinquencies and charge offs in 2023 – similar to what we see at the Synchrony’s and Capital One’s of the world. Canadian bank earnings are hardly impressive either. We think there trouble brewing here on many fronts, and think this name faces meaningful negative earnings revisions ahead.
Crocs (CROX) | Getting heavier in this one short side. Taking higher on Best Idea Short list. We think that growth is slowing and the company is over-earning. We’re particularly concerned about the rapid rise of Hey Dude, the acquisition of which it lapped last week. Promotional cadence for the brand is unhealthy and borderline alarming for such an early cycle brand (we’re going to hit on the source of this in our Athletic Footwear deck on Tuesday “Duopoly Destruction or Paradigm Shift”. More to come on CROX on Tuesday.
Home Depot (HD) and Lowe’s (LOW) | Moving higher – yet again – on Best Idea Short list. The bad news we see out of the home improvement space is no secret. But keep getting peppered with questions from investors about whether “it’s time to cover”. Our answer is unequivocally NO. It’s time to press. The macro forecasts put out by both companies are too optimistic, and we see earnings coming down by 20-30% over the course of this year, and the multiples with it. Notable is that Floor and Décor was higher than HD and LOW on our list, but now it’s below, as management right-sized expectations to a level that is potentially doable. Unlikely, but not the severity of earnings downside we see at HD and LOW. Also notable is that when we exit Quad 4 (presumably) at the end of 2Q, trends at HD and LOW are likely to continue to decelerate. These names will outlive Quad 4 on the short side, which should accelerate the flow of funds out of names which (for some reason unbeknown to us) are considered safe. For more deets on our positioning on these names, see our latest Black Book and Home Scenario analysis on the space. Home Retail Scenario Call Replay Link CLICK HERE
Acushnet (GOLF) | Moving Higher on Best Ideas short list. You wouldn’t think many peak earnings, peaky multiple stocks with high expectations were still out there in consumer land, but here is one. The company put up good 4Q results, with ball and club demand remaining strong probably still satisfying some of the pandemic demand boom. The company is guiding up the full year, which we think is very aggressive. Despite the narrative around the pandemic newcomers to the game, the NGF reported that golf participation over the last 3 years is up just 5% total, and a good slice of the growth was youth players (that don’t drop thousands on new Titleist clubs). Meanwhile rounds are up 16%, and GOLF equipment is expected to be up about 45% in 2023 compared to 2019. So that means the growth has been from core golfers playing more, and replacing equipment, at elevated prices. With macro getting worse and early signs of the high income consumer cutting spending, we think these earnings numbers won’t be met. We think rounds continue to revert (down 3.7% in 2022), which could drive a disappointment in balls as well, even if staying well ahead of 2019 levels. Meanwhile, GOLF’s inventories are up a lot, to be specific up 63% yy on sales up 6%, and +69.4% vs 2019 with sales up 21% (so not just lapping a lean year as implied on call commentary). We think inventory is starting to build in retail, both in new and quality used equipment. For 2023 we’re coming in at EBITDA of $290mm vs the street at $350mm, at 8-10x EBITDA it means a stock in the high 20s to mid-30s vs current $52.
Upbound Group (UPBD) | Taking lower on Short Bias list. The likely first reaction to this move, is “who?”. This is the old RCII, now with a new name/ticker. The company guided down again on its recent full year print. Since we added this to the short list 2023 EPS estimates have gone from $8.28 to $2.78. We’re not quite sure the downward revision trend is done, but its certainly in the later innings. The narrative that will likely get some individuals more bullish on the stock intraquarter is that when consumer credit tightens, UPBD becomes the “lender” of last resort with its lease to own model. That would mean share gains until the consumer credit cycle bottoms. We think there is still risk to the loss/bad debt profile for UPBD, particularly with the added Acima business. And in prior recessions, we hadn’t had such unprecedented over consumption of home durables ahead of the consumer credit tightening, so this time is different. Still, we’re risk managing this one at least until we get more data and get closer to another earnings event where the reality may prove to be less bullish than the market thinks.
Urban Outfitters (URBN) | Removing from Best Idea Short list. The company missed the quarter last week, and the stock did a whole lot of nothing. One thing we can’t ignore is that inventories have corrected, and margins begin to face seriously easy compares starting next quarter due to the excess discounting at the Urban Outfitters brand (~40% of EBIT). We’ve also seen Anthropologie (another 40% of EBIT) perform really well in the face of a tough consumer climate. We were waiting for that shoe to drop, and have no clear line of sight on when it will. Granted, with inventories under control, comps are likely to come under pressure, but margins (POD 2) will likely improve. We have lower conviction in another earnings miss, so are taking this down to our short bias list. The stock isn’t expensive at 11x earnings. And if we see a margin-fueled earnings recovery, this name could go against us. We like to target 40% or better returns for our Best Ideas (much more than that over a TAIL duration), and URBN no longer makes the cut. Keeping this on short bias list because we thing we’ll see a revenue deceleration given tight inventories, and revenue slowdown (POD 1) usually wins out over POD 2.
VFC Corp (VFC) | Upping to Best Idea Short List. We worry on one hand that this is turning into a consensus short. But the business trends are just SO bad at its two core brands Vans and The North Face (which account for ~50% of cash flow) and we don’t see a way out except for meaningfully upping R&D and marketing, and re-establishing a connection with the consumer – because that has been lost. 2023 expectations look reasonable, but the multiple on those earnings does not. This company still has a balance sheet problem despite cutting its dividend on the latest print. There’s simply a share donor like VFC should be trading at 11-12x EBITDA. We’d give this a 7-8x multiple at best, which is good for at least 30% downside from here. We have a tough time seeing how you get hurt shorting VFC here. Only 6% of the float is short, the core brands are dead or dying, and the company is meaningfully underinvested in innovation and marketing. It has to rebase earnings lower to get the top line going again, perhaps closer to $1.00 per share vs the Street at $2.00.
Hibbett Sports (HIBB) | Taking higher Short Side. We ‘get it’ that the company just put out a weak quarter last week. But the problem is that this company is sitting on double the inventory it had at this time last year. Like up ~100%. We can’t make these numbers up. And it’s not promoting. Why? Because Nike is telling it not to. Hibbett has evolved into one of Nike’s best off balance sheet assets. Yes, Nike is giving HIBB the footwear it needs to survive, but it is doing so at the expense of jamming it with apparel that Nike does not want to clear on its own. This spells MAJOR gross margin risk for HIBB in 2023, perhaps sooner than later. The stock looks cheap at 7x earnings, but Street EPS is too high – and with 70%+ reliance on Nike, it deserves every last bit of that bottom basement multiple. There’s no reason why this name shouldn’t trade at 5x a number 20% lower than where it is today.
InterParfums (IPAR) | Going higher on our Best Idea Short list. IPAR Wednesday put up a 4Q EPS well ahead of its prelim guide with $0.52 vs $0.29 expected. The company is also guiding up the full year to $4 vs the prior $3.75. Fragrance demand has been on fire around the greater beauty reopening demand we’ve seen over the past few Qs. Like ULTA, this name has benefitted from exceptional reopening trends, and is currently benefitting from a consumer that is over-consuming the category. This company is over earning on the margin line. It is putting up high teens EBIT margin, when pre-pandemic is operated at about 13-15% margins and we can’t see anything that structurally changed to sustain those margin levels. We’re modeling mean reversion over a TAIL duration in margins. Currently trading at 33x 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 40%+ as the category reverts over a TAIL duration.
Burlington Stores (BURL) | Moving from Best Idea Short to Short Bias list. We saw TJX and ROST both with meaningfully contracting inventories in the last est quarter, and gave them flack for it. They should be using their balance sheet as an offensive weapon to take advantage of the generationally high inventories in apparel, pack them away, and sell in another 9 months to drive comp and margin. BURL did the exact opposite. The quarter did not look good by any means, but inventory was up 16% on 5% sales growth. This might be one of the only off price retailers that can comp this year. Maybe TJX (best in class by a country mile) and ROST are being smart and playing hard ball with vendors to buy extra cheap (we’re seeing inventories much more bloated at the brand vs the retail level). But we’ve got to stick to the process, and they inventory trends (POD 3 – cash flow) are setting the company up to drive its top line this year. We still absolutely don’t believe in the margin recovery story here. We think the company is woefully underinvested in SG&A and its merchandising organization compared to its competitors, hence, we keeping this name on our Short Bias list. But will look to add again as a Best Idea on a rally around a good top line quarter in mid 2023.
FIGS, Inc (FIGS) |Taking lower on Short List. Short Idea FIGS showed its true colors Tuesday – with a massive 26% drop in the stock. Our primary concern with this name is that while it innovated a category (medical scrubs) that hadn’t been innovated in a hundred years, it attracted too much competition and would need to discount and promote in order to clear its inventory – while at the same time conditioning the consumer to expect discounts. We went short this name at $12 and said that it’s worth $4-$5. At $6.50 after Tuesday’s shellacking, it’s almost there. Almost. We think this name is permanently a mid-single digit stock.
Ulta Beauty (ULTA) | Reports Thursday. ULTA is up 36% since the last earnings report. The stock has been on rails. Traffic trends have looked very good, as presumably has the credit card data. It’s pretty much written in the cosmos that this company will beat a conservative guide, supported by the strong results we’re seen out of beauty companies so far. IPAR reported this past week with a beat and raised guidance and e.l.f. has been having unprecedented growth as well. This has been a frustrating short for us – as we were definitely early in our call. Early means wrong, and we hate being wrong more than we like being right. But this stock is priced for perfection over $500, and we think that a combination of comping against an aberrational reopening year in 2022, where it had the best new brand launches we’ve seen in years, on top of the increased competitive threat of Sephora shops opening up on ULTA’s doorstep presents significant TREND and TAIL risk. Remember back in 2019 where the stock lost 40% of its cap in one day? That’s what we’re expecting from ULTA when the Street finally realizes that a 16% margin is simply not the ‘new normal’ especially for a company that’s running out of unit growth. We’re frustrated on this one, but are sticking with the research process and our model that says deceleration on virtually every line (except SG&A) is in the cards for 2023.
Big 5 Sporting Goods (BGFV) | Remains a Best Idea Short. BGFV reported an ugly 4Q this week, 8 cents in EPS down from 89 cents last year. 1Q is being guided about 75% below the consensus (only 1 analyst estimate) with comps to be down MSD. With Nike gone as a vendor, BGFV is rapidly losing relevance and ceding share to much better/stronger competitors. The sporting goods category hasn’t even seen its worst days yet, as we expect reversion in 2023. We think EPS here is headed to zero in relatively short order. The company is paying out an annualized $1.00 dividend, while it will be lucky to earn a few dimes worth in 2023. Cash balance is sub $26mm, meaning the dividend could eat through the entire remainder of cash this year if not cut. We think BGFV has a high probability of going away over the next few years.
Victoria’s Secret (VSCO) | Moving Higher on Short Bias list. This short has worked well as we added it back on the November highs, but this week’s earnings print showed very weak trends. The headline was a beat but with the company finding more margin than was in its prelim range from Jan. Still margin trends look weak with inventory elevated at +13% vs sales trending down MSD. 1Q was guided well below consensus at EPS $0.30-$0.60 vs street $0.84. The company is guiding full year revs inline and EBIT margin flat… that guide has a lot of hope in it from where we sit. We think there is a risk of a miss/guide down from here. The brand is losing relevance with the core consumer and giving up share. We see earnings power here of $3.50 to $4.50 whereas the street is building to $5.50 to $6.00. We’d argue mid to high SD is where this mall apparel retailer should trade, stock probably has another 20 to 30% downside to the mid to high 20s.
Dick’s Sporting Goods (DKS) | Reports earnings on Tuesday. We remain bearish on DKS as we think demand and margin reversion will be taking earnings lower over the next 12 to 24 months. We think 4Q comes in about in-line with revenues ahead, but some give back on margins. The company has done a nice job executing and gaining share during the pandemic ramp in sporting goods/outdoor demand, but we think consumption reversion is still to come in some core DKS categories. We also can’t ignore that DKS is still a large apparel retailer, and apparel inventories remain elevated in the supply chain, with DKS admittedly it still has a little work to do of its own on apparel Total inventories were up 35% last Q with comps up 6.5%. We’d flag that HIBB has inventories up 84% per store, expecting sales up just MSD. Visits trends have looked decent in 4Q, weakish in peak holiday season, accelerating when lapping Omicron, but looking weak in recent weeks. We think there will be some points for both bulls and bears on this print, but ultimately we have TAIL earnings around $9 vs street at $13, and think a fair price range for DKS is $80 to $100 vs current $130.
