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
Here’s an important note from last week -- bearish apparel datapoint, suggesting negative revisions not over. Retailers in better shape than the brands.
Average import cost up 17%, inventories at retail improving marginally, but far from clean. Brand inventories look outright dangerous.
For Full Note CLICK HERE
Capri (CPRI) | Presenting at Conference this Week. CPRI has been acting like death for the past three weeks – going from $50 to $43 in a straight line. It’s being priced like there something wrong with components of the portfolio, it’s setting up for an earnings miss, or there’s been forced selling. Only 3% of the float is short, as it’s extremely difficult for us to put our best bear-cap on and come up with downside to the P&L from here. Department store traffic has weakened in the past few weeks, which likely spurred the decline due to weak demand and conservative inventory buying at the Kors brand. Yes, Kors revenue is under pressure this quarter as it cuts off lower tier department store doors – but that’s a) already well telegraphed, and b) a long term net positive to shift to a predominantly DTC model. We think management will be cautiously optimistic around the company’s performance, as we think it set a beatable bar in the upcoming quarter – even a Quad 4 quarter. We also think that in Q&A, when push comes to shove, the company might plant the seed that a CEO change is in order at some time in 2023 – which is probably good for a 20% pop in the stock on a single press release. This remains one of our Best Long Ideas and we’re aggressively defending it in the low $40s. We think it’s well over $150 over a TAIL duration.
Re-ranking the ‘Bones’ – BIRD, REAL, PLBY. If there’s one thing that’s clear, it’s that we need to produce another ‘Bone, Bagger or Bust’ deck given the massive number of discretionary names trading under $5 and have been seemingly left for dead. Some are justifiable (BBBY), because in this bankruptcy cycle (which started already) we will see companies go away entirely. Then we have the private equity cycle, which bleeds into an IPO cycle, which we think could happen as soon as 2H23. As noted in our Athletic Deck last week, we think there are exciting growth opportunities in athletic footwear/apparel alone that will likely IPO (StockX, GOAT, Vuori, and perhaps Canada Goose, if it’s not bought by LVMH). Here’s our take on the three names noted that currently sit (at a loss) on our Position Monitor, newly ranked. Exiting Quad 4 can’t come soon enough!
- Allbirds (BIRD) | A real brand with TAIL potential trading at cash value. We said to sell ahead of last week’s abysmal quarter. And then the stock subsequently got shellacked and caught five downgrades. Left for dead. The stock is officially a bone, and we got into this one too early. But looking forward (which is the only way we can look) the Enterprise value of this name is simply pathetic relative to the company’s balance sheet. It has a $194mm market cap, and an EV (due to excess cash on hand) of just $26mm. Yes, you read that right. The market is valuing this company close to zero. It’s trading just $15mm above cash value. In theory, you can liquidate the company, satisfy all long-term obligations/leases, etc… and still net between $100mm-$200mm. And that ignores the positive changes that the company is making around the talent side of the organization by bringing in leadership from Adidas and Nike to reinvigorate the product line. It’s slowing store growth, which is a BIG positive, and the last leg of the chain is to substantially boost its wholesale model, where management has been moving much too slowly – but new blood likely to accelerate that. If we’re doing the math on the value dislocation here, then you can bet that private equity is too. This is a PRIME takeout candidate, hence #1 on our ‘Bone’ speculative list.
- RealReal | A close second to BIRD, we think that to rebuild what REAL has created would cost $700-$800mm, with the current enterprise value at $300mm. New CEO in place cutting non-essential costs and ridding the assortment of lower priced items (which lose money), and we’re seeing an increased trend to consumers ‘trading down’ (and in some cases ‘trading up’ by buying limited edition product at inflated/mark-to-market prices on REAL). Goal is to surpass break even in 2024. This company’s got debt, but the market value of the debt is roughly 60% below the book value. It’s trading like this will no longer be an ongoing concern. We disagree. We think this either gets taken out closer to $5 (at $1.36 today), or evolves into a 10+ bagger over a TAIL duration as a stand-alone entity. REAL has built the best mousetrap in the business at a time when everyone is flocking to get into the luxury resale market. It’s highly unlikely to see anyone replicate the size and quality of REAL’s authenticator capabilities. We’d suggest looking at the debt in addition to the equity.
- PLBY Group (PLBY) | The Third Bone. I get it, I (McGough) have zero credibility on this name. I’ve made thousands of calls in my 30 years, and this will forever standout as the worst one, with little coming close. Long at $25, didn’t get off at the frothy $60 peak, and now it’s a Bone. Did I learn a lot from this one? Yes, once I’m no longer teachable I hang up my cleats. But one thing I’ve learned is to play the cards I’m dealt, and evaluate the situation from where we are today and what the go-forward path is. I have no problem calling it quits on a call when I’m wrong and moving on, but sub $2, this name is trading at a 60-70% discount to liquidation value. Those narratives don’t work in Quad 4. But it could sell Honey Birdette and become a debt free company in a heartbeat. Do I want to see that? No? HB is a tremendous asset, and should be one of the top three initiatives here. Check out McLean’s preview of the quarter (this Thursday) below, but this company could beat, AND put up a bullish narrative around China, and it might still go down. I have never in my career seen less confidence around a management team. And from where I sit, the only answer at this point is to push Kohn up to a non-Executive Chairman role (Rizvi highly unlikely to outright fire him) and get a professional turnaround specialist as CEO in there to realize the HUGE upside this model has embedded in the core. We’re moving it the bottom of our ‘Bone List’ simply because we view BIRD and REAL as more catalytic ideas where we can put our fingers on actionable change and a positive move in the PODs over a TAIL duration.
ARHS Staying Short. We’re staying short ARHS and we detailed the call in our note post earnings ARHS | Day of Reckoning – Best Idea Short. As we work through the math on what comps could look like in 2023, there is an alarming setup when we get into 2H. Backlog satisfaction has added 30 to 40pts to comp in the recent quarters, while demand comps are slowing (currently +HSD QTD). That excess revenue presents a big revenue headwind in the back half of the year once the backlog gets cleaned up. We could see comp sales down 20% to 30%. We think demand comps get worse too as there is a lagged impact of the crash in housing market activity over the last 9 months and how it flows into real time home retail demand. It at least has some store growth, but comps going from +40% to -30% with negative revisions to EPS will definitely take this stock lower. We think it’s a $4-$6 stock vs its current $9.44.
Williams Sonoma (WSM) Moving Higher on Best Idea Short List with ARHS Read. WSM has likely had similar results around comps relative to demand comps and excess revenue from back log. The company hasn’t set the expectation around revenue risk here in 2023. Last Q the company noted demand comps were slightly negative while reporting an 8% comp. This Q demand comps likely weaken but the company ships more of the backlog. Again the spread here of ~10% means a real headwind into 2H where we expect demand comps to continue to get worse. We could see quarters in 2023 where WSM comps down 15 to 20% while the worse expectation is currently -3%. The company will likely have to guide down 2023 revenue materially much like ARHS did this week. We think the real earnings power for WSM is below $10 per share, compared to the ~$16 it earned this past year, and $14 the Street has modeled in 2024.We think this is an $80-$90 stock vs current $120. Home Retail Scenario Video Replay Link CLICK HERE
PLBY Group (PLBY) | Reports Earnings On Thursday. We expect we’ll see continued pressure on business trends that we saw the last couple Qs. The apparel space, which is a majority of PLBY’s business remains under pressure, China (big region for PLBY) was still negotiating lockdowns in 4Q, and the consumer in the US and globally remains challenged as it relates to discretionary spend. With that said, PLBY is trading below liquidation value with the market showing no confidence in management’s ability to execute the growth plan. We have a couple notable events for PLBY over the last few months including the rights offering that enabled a $70mm debt paydown which waives leverage ratio covenants though 2Q2024. Additionally the company announced a JV with Li & Fung to handle its Chinese licensed business. For details see our note PLBY | Beginning of a Narrative Change. As it relates to the quarter, we’ll be looking for a few key items. 1. A solid liquidity position 2. Indications of the continued health of the brand as it relates to relevance with the consumer 3. Progress on key strategic initiatives the new product lines (main one recently being Playboy Lingerie) and directional improvement in Centerfold metrics. Whats priced in today is that nothing incremental works, and the company just has a legacy licensing business and Honey Birdette with no expectation of growth. We think the discussion of China JV will be bullish on the margin. Though to keep it real, the only thing that gets this stock going is if Rizvi replaces Ben Kohn as CEO. We think it’s a matter of when, not if. The stock probably doubles on the day with that press release.
Signet (SIG) | Reports Earnings On Thursday. We remain negative on SIG into earnings. Visits trends have looked ugly at Jared after the lapping of Omicron, trending down high teens in recent weeks. The jewelry category is just starting to revert, while PCE is still 44% ahead of 2019 as of 4Q22. SIG has been buying up other business including Diamonds Direct and Blue Nile at peak demand, which we think will prove to be overpaying as it relates to the next couple years of earnings power. Short interest is back below 12%, the stock screens as cheap but with macro getting worse at an accelerating rate we think jewelry consumption is likely to revert hard and fast after the massive reopening and wedding demand is saw over the last ~18months. We see fair value here in the $50 to $55 range vs current $71.
Dick’s Sporting Goods (DKS) | No Change, Bullish and Bearish Points From 4Q Print. DKS put up a decent quarter this week, with a small headline beat, as we expected revs ahead with massive margin giveback. The bullish callout is the doubling of the dividend. That says a couple things, one is that the company thinks cashflow will be sustainably higher than pre-pandemic, that’s fair, though we do expect earnings reversion relative to the consensus. It also perhaps suggests the company thinks the stock is high, if it wasn’t, why not buy back more stock with the excess cash? Margins are falling rapidly despite the company ensuring sustainably higher margins vs pre-pandemic. Merch margins were down 640bps this Q, that partially the inventory issues in athletic apparel, but still… its one of the worst results we’ve seen in retail this Q. The most bullish data point is in the continued growth of its premium athletic footwear offering, which is being added to another 100 stores this year. More Hoka and more Nike are definitely good for the DKS footwear business. There's a reason it hasn’t become a Best Idea short yet, as the company is taking share and the category has been holding up surprisingly well leading to very strong cash generation for DKS. Though there are also reasons we haven’t gotten incrementally bullish. To want to buy here you have to believe in several things. One is category demand sustainability. Outside of athletic footwear I'm not sure we believe that, and looking at the gains in revenue in the context of our macro we think you could see a negative MSD comp. Second you have to believe in elevated merch margin potential (the management bull case a year ago) while merch margins are collapsing. Again, outside of athletic footwear, we’re not sure you are going to get sustainable merch margin performance. Lastly, you have to believe in a sustained elevated valuation something more like 7 or 8% FCF yield vs more like 9-11% pre pandemic. Maybe with some competitors having fallen out of the market, and if believing in higher margins we could eventually underwrite the step up in valuation. But today we don’t think we can check all of those boxes. DKS remains on the short bias list, but if we don’t get evidence of category/demand pressure over the next 3 to 4 months, we’ll have to revisit our bear stance.
Academy Sports and Outdoors (ASO) | Reports Earnings On Thursday. We got off our ASO Long call a bit early (~$50 in late 2022 – it’s pushing $70 today) and we’ve been short ever since the Nike inventory problem was made public in Dec. Our call is around margin reversion when the category slows and fully digests the elevated inventories. We wouldn’t be pressing the short into this print though, as we’d expect something resembling the DKS result, though ASO has actually had better margin trends in recent Qs. We’d consider ASO a lower quality retailer as it relates to store experience, total assortment, and promotional strategy, but that perhaps is reflected in the lower relative valuation to DKS. ASO is also opening opening units, which perhaps suggests it deserves a higher multiple, though it’s probably not going to be a market for great new store performance over the next year. Visits trends below look decent at ASO, down YY, but improving in terms of rate of change over the last few months. Think the company is likely to put a decent Q without much reason to slash 2023 expectations, at least not yet, with the street expecting slightly negative comps and flattish EPS.
Wayfair (W), Etsy (ETSY), Groupon (GRPN) & Silicon Valley Bank SIVB. The big news in the financial world is of course the rapid collapse of Silicon Valley Bank this week. Though most of the firms impacted look to be private tech companies, we’ve found a few notable names in our universe that have exposure.
- ETSY apparently uses SIVB to hold funds that are due to sellers post transaction. It appears since Friday many sellers have been unable to redeem cash from their ETSY accounts into their own checking accounts. You’ll find plenty of examples with a quick google search. Perhaps this gets resolved, but it could be a significant catalyst to drive more seller business to the likes of AMZN, EBAY, or Shopify.
- W appears to have a portion of its letters of credit for it’s $600mm revolver with Silicon Valley Bank. There are other parties on the revolver, but it would seem that a portion of W’s liquidity from the revolver is at risk.
- GRPN looks to also have a credit relationship with SIVB.
W 2021 Credit Agreement Update 8-K
Source: Wayfair Company Filings
Five Below (FIVE) | Reports Earnings This Wednesday. We’re short this name, but the trends this quarter are going against us. Traffic visits look robust, and credit card data has been positive. Still, we definitely don’t think this highly discretionary category is immune from Quad 4 and the slowdown in consumer spending that we expect to see in 1H. Guidance is unlikely to top the Street, and we’d look to get heavier on the name on any strength around the quarter (it currently sits near the bottom of our short bias list). At 34x earnings and 22x EBITDA, it won’t take a POD 1 or POD 2 slowdown well. 
