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
Nike (NKE), Best Idea Long | Expecting a BIG Quarter on Tuesday – The Start of an Upward Revision Cycle. As outlined in our recent Athletic Deep Dive Blackbook CLICK HERE we think that Nike is executing on its footwear game better today than in the company’s 50 year history. It’s simply on fire. Apparel is a different story, where it still has too much inventory, but we think that Gross Margin pressure is largely being transferred to its global partners like FL, DKS, JD Sports, HIBB, and KSS, among others. We’re coming in at $0.85 per share this quarter vs the Street at $0.56. Yes, we’re aggressive in our forecast, but we think top line and gross margin will both beat in almost every region and product line. The big question is around guidance, as the company has only one quarter left in its fiscal year, and this management team are no dummies. They know we’re in a recession and will want to temper expectations – even if they think they can do better. We think that the company’s earnings next year will break out, in part due to higher per capita consumption of footwear, but most notably higher ASPs, shift to DTC, and massive market share gains from Adidas – which is 3-5 years away from a turnaround – if at all. The stock is expensive at ~30x earnings (lower on our numbers, which are well ahead of the Street). But this name SHOULD be expensive, and we think you get paid by earnings growth here. Mind you – earnings have been flat at ~$3.50 since the pandemic started, and we think that there’s going to be meaningful catch up over the next two years taking the Street much higher. The Street is marching up to $4.75 over a TAIL duration, but we think over $6 per share is squarely in play. We think that Nike will supplant the likes of ULTA as the new ‘safety stock’ in retail over the next year and in this negative GDP growth environment as numbers are upwardly revised. So is it cheap, No. But being cheap or expensive matters far less to me than the direction of earnings revisions. And in Nike’s case, they’re headed higher by a long shot. Upping a notch on our Best Idea Long list ahead of the print.
Check out the MASSIVE Divergence in discounting trajectory between Nike and Adidas over the past three months.
Arhaus (ARHS), Best Idea Short | Staying Short Despite Selloff. ARHS big comp guide down – stock got shellacked a couple weeks back, and went down another 10% last week, but we’re staying short. Stock is at $8.50, and we think there’s downside to $5. ARHS had a solid 4Q, but it was aided by the pull forward of revenue from accelerated satisfaction of its backlog. But now the company is guiding to negative comps with the street expecting +9%. QTD demand comps running up HSD, with the company implying comps are likely to converge with demand comps given satisfaction/pull forward of backlog in 2022. Now inventory is outgrowing the sales trend, as well. We think ARHS is over earning, with abnormal demand and margin trends from satisfying the backlog of pandemic demand. Now revenue should come under pressure and margins should revert rapidly. The street has EPS marching up to $1.00 per share over a TAIL duration, but we think that we are at the peak. This company went public when it did for a reason. Ultimately we think this is a $5 stock on $0.50 per share in earnings.
Williams-Sonoma (WSM), Best Idea Short | The Next ARHS. WSM Didn’t Guide Down Enough – Taking Higher On Best Idea Short List. The quarter is old news now, but EPS inline, with ugly comps, and guide about inline with street. It’s the first guide without CFO Julie Whalen – the only member of the WSM management team that had any credibility. Simply put, we don’t believe it. Guided to top line of 0% at the mid-point, with margins roughly in line with long-term targets. The company whiffed on this one. It has a free pass right now to guide down to an appropriate level for the deceleration in demand we’re already seeing in the home furnishings category, and yet it came out with the most bullish forecast imaginable. The lack of backlog looks to be a risk on revenue in 2023 as we expect end demand to continue to slow. The company put up ~$16 in EPS last year, with the Street at $14 this year. We think the company will be lucky to earn $10. We’d short this event -- aggressively. Taking this one higher – again – on our Best Idea List. With the stock at $117, we think it could see $80-$90 as downward revisions come throughout 2023. Too many people want to believe in this name, and we think they’ll be disappointed.
Capri (CPRI), Best Idea Long | Important C-Suite Insider Buy. CEO John Idol was on the tape on Friday making his most significant insider open market buy in years – 240k shares at ~$41 for net investment of about $10mm. This stock has been taken out to the woodshed over the past month, losing 37% of its value from a messy (and rare) 3Q miss. At $41, we think this name has 3-4x upside over a TAIL duration, with very defendable downside, minimal risk to earnings (we’re modeling material upside), and a kicker one of the most hated CEOs in Retail is out there buying stock in his PA (but even haters will admit that he’s savvy about his PA). We think this one is near the bottom end of the bottoming process, and see the stock meaningfully higher over a TREND and TAIL duration. See our latest note on CPRI for more detail CLICK HERE.
Boot Barn (BOOT), Long Bias | Removing from Long List. We added BOOT to our Long Bias list around $60 – while we got heavier in the research. It’s not panning out. With the stock at $72 we’re taking this one off. Traffic trends have not been encouraging. Perhaps the ‘Western Fashion Trend’ is losing its luster. But our bigger concern is that we think the company’s store plans are too ambitious. It’s growing its footprint, and our concern is that it has already penetrated its core markets and is moving to new regions where the consumer is less sticky, and is building long-term assets for potentially short term trends. We wouldn’t short this name – yet at least. But after taking it through our vetting process, it’s not one we’re comfortable sticking with long side with what we see today.
PRADA (PRDSY, 1913-HKG) | Short Bias Idea Prada is getting the boot. We’re taking it off our list for now for a host of reasons. China reopening, which is a big comp catalyst for all of luxury, has a strong play here. Miu Miu has been executing well recently and is back on the forefront of trends driving sales and increased attention to the brand. Prada and Miu Miu have taken up pricing, which helps comps, but it is not the only reason the company has been comping. Currently trading at a 27x PE multiple, this stock isn’t cheap, but also isn’t expensive for its historical trends nor luxury comparables. There is also a shift in the organization. The great-grandson will be the head of the group while an outsider will be the CEO. The Miuccia Prada and her husband who were co-CEOs will now shift solely creative director and chair of the board, respectively. While still having the family involved, the inclusion of outsiders is a shift in this company and indicates the openness for longevity and the shift to a younger generation. There are a number of catalysts for growth here, and we aren’t comfortable being short this anymore. We’ll continue doing work on this.
On Holdings (ONON), Best Idea Short | We can’t not be short this into the print. We think ONON is going to blow up in spectacular fashion sometime over the next 12 months. The brand is simply growing too fast, and unlike Best Idea Long DECK (Hoka) it is not tiering and selectively distributing by channel, tier, and price point. It’s literally blasting its product everywhere. That is fine when the brand is hot, which it is. But keep in mind that this is a rookie management team that has never run this business through a full economic cycle – never mind a fashion cycle. The company’s DTC outreach has been robust, as evidenced in the RandomWalk chart below. But we think that in 2023 this company will have proven to have stuffed the channel with the same product it’s trying to sell direct-to-consumer, which is a dangerous game to play. That means that in a single quarter we get a sales deceleration, gross margin hit, SG&A deleverage, and inventory bloat. This smells like when Olaplex blew up last year and lost half its market cap in one day. Will this be the quarter where it blows up? We’re not sure. We haven’t seen signs of excess discounting – yet. But we’re near certain it will come. In the meantime, you’re looking at a stock at 52x earnings and 26x cash flow.
Oxford Industries (OXM), Best Idea Short | First glimpse at real organic growth in this Week’s Print. OXM anniversaries the acquisition of Johnny Was in the upcoming quarter, and with that we should see a slower and more normalized level of growth in the fincial model. We still think that a) it bought Johnny Was at the top of the cycle for high end apparel, and b) the company is overearning by 400-500bps on Gross margin compared to the real earnings power of this company. To be clear and #accountable, we’ve been wrong on both the model and the stock over the past year. For the life of us, we don’t see how earnings are sustainable here. The Street is modeling $10.75 this year, and then $12 over a TAIL duration. We simply don’t see how that’s mathematically possible. Mind you, this was a company that earned $4.30 per share pre-pandemic, and there’s nothing that’s materially changed to boost permanent earnings power by 3x. We think the this quarter is ok, but the May earnings announcement should really show the true colors of the model after facing impossible multi-year positive comps both at the consumer and company level. If we’re not right on this one in short order (by the May earnings release) we’re likely to take the loss and move on.
GameStop (GME), Short Bias | Reports earnings Tuesday after the close. After going short in late 2022, we moved this higher on our Short Bias list 2 months back amid the January short squeeze with the stock around $21. The stock has corrected hard with the market selloff over the last couple months. Back when we were bullish we outlined a bull, base, and bear case for GME in a deep dive presentation. In that presentation we got to a Bear case value of $40 ($10 after the split). With the consumer slowing and data continuing to support deteriorating macro, that Bear case is evolving into the Base case, and the Bull case opportunity is shifting far out into the future. Near term a revenue beat might be the risk for the short, as 4Q store visits look decent relative to most of retail (with store count likely down) and the company has high inventory levels. Though the trend since Q-end looks to be weak, and slowing, while consensus numbers are expecting an acceleration. Though keep in mind GME hasn’t been guiding under the Ryan Cohen regime, we don’t expect that to change. GME is trying to reduce headcount and cut costs like many other consumer companies as it has been burning cash eating into its war chest raised when the stock was much higher. Cohen himself in an interview late last year was very clear about how challenging the GME business is and that a turnaround won’t be easy. The turnaround under Ryan Cohen may very well work, but it will require a lot of time and capital to execute. We’d put a fair value here in Macro Quad4 around $5 to $10 ($3.50/share in cash still as of 3Q) vs current $16. Maybe if the stock is approaching the mid-single digits speculation starts around Cohen taking this private.
Chewy (CHWY), Long Bias | Reports earnings Wednesday after the close. We took this off our Best Idea Long list with the stock around $49. We noted then that near term is seeing risk around lower growth and slowing online interest. The problem for CHWY right now is the low customer growth, as it like many ecomm players continues to churn off customers added during the pandemic. That, along with general pressure on consumer spending, is likely driving the revenue slowdown implied in guidance. Hardgoods is impacted both by the consumer mindset (discretionary spending slowing) and the fact that we are lapping the pandemic boom means pet households are flat to down at the moment. CHWY has at least been putting up some of the best top line growth in the ecommerce space. We’re still believers in the long term model here with this being an online leader in a solid TAIL consumer category of pet care, but we don’t like the comparison setup for the next two quarters (including the one being reported this week), with risk to YY customer growth stalling out. We think you buy this if it trades down close to $30, and until we are in a better market environment with accelerating trends we think the most of the upside is priced in if it trades up to around $50.
