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
RH, Inc (RH – Best Idea Long) | The print on Wednesday is going to be polarizing. There’ll be plenty for both the bulls and the bears to chew on. When it announced the accounting gaffe around the convert, it commented that sales are coming in at the low end of the range, and margins at the high end. The company is on track to put up about $25 in EPS this year (with ~$3.30 in 4Q), and the Street is modeling a massive decline to $16.50 in FY24. We think there’s a 90% chance the company takes down that number – even though we don’t think it has to. Our sense is that it guides to a $14-$15 number, which is what the buyside is expecting based on all of our conversations with the Street. Mind you, management has been overtly cautious about the forward outlook for the better part of a year. Where we could be wrong on the day is if the company comes out with a $12-$13 guide. That’d be a bad day. We think $14-$15 is probably in the stock at $240 – which is below the price that the company bought back ~$750mm in stock in the latest quarter. Our sense is that Friedman saw the rate of decline in the business level out, which, along with the price, prompted the buyback. Are demand comps still negative? Of course, but we think that the rate of decline improved on the margin vs what the company has been seeing over the past nine months. Also keep in mind that the upcoming 12 months is HUGE as it relates to a) product refresh, b) roll out of Contemporary, c) a record number of gallery openings (it’s investing big in a downcycle, which we’re huge fans of), and most importantly, d) the rollout of Europe, which we’re particularly bullish on. When we talk to investors, we’re often getting the question about which companies should have the biggest earnings rebounds in CY24. The hands-down winner is RH (Nike is a close second). And we have our 3-4-year model marching up to nearly $60 per share, vs the Street at $24. We think people are underestimating all the idiosyncratic growth drivers, the margin sustainability, and most notably how big Europe will be for the company and valuation. We get a lot of pushback on Europe, and that ‘the RH American appeal won’t translate.” We couldn’t disagree more. First off 80% of the RH designers are European. We’ve adopted their designs – not vice versa. Secondly, the company is going into each market on a local level – as the tastes and consumer preferences (and furniture size) are radically different by country, as opposed to the US which is a homogenous market. And lastly, it’s going into Europe as a pure luxury brand (with price points accordingly) as opposed to having to convince the consumer over a 15 year period (as it did in the US) that it’s a luxury brand after being a mid-market brand 10-20 years ago. Will the company have to spend around this? Yes…and it will. We LOVE when companies invest in downcycles. The Street hates it, but we’re big fans. We’ve got sales up next year (let us know if you want our revenue build), gross profit up, and SG&A de-leverage as it spends around the brand (though we think it will cull some jobs at corporate – and likely has been over the past quarter). If the stock sells off on this guide down, we’d be aggressively buying based on what we know today. We think this is well over a $1,000 stock over a TAIL duration…and if you get the chance to buy it closer to $200 on this print, more power to you. If it trades up, we’d be buying it anyway. The company will likely be buying alongside you either way. The pent-up earnings power here is like nothing we can point to in global retail.
Lululemon (LULU – Short). Short Idea LULU reports this week. This isn’t a TAIL short, but we added to the short bias list when NKE first came out with its inventory issues, and Lulu soon followed. Lulu has had inventories up approximately 86% the last two quarters and has been promo’ing more lately with a larger sale selection. Unlike Nike, Lulu can’t push the excess inventory (and gross margin pressure) to its wholesale network, because it doesn’t have one. We wouldn’t be surprised to see a top line beat because of this elevated discounting, margins will take a hit, which is what management guided to when it reported Q3. It guided down on EPS and decreased the GM expectation, while raising revenue guidance. But we think it issues the same outlook again. For FY24 we would like to see some more right-sizing of inventory along with another guide down. At that point, we’d probably like to own it (at a lower multiple and price). This company isn’t a broken one (it’s an ‘A’ brand with a ‘B-‘ management team), we just think some control in inventory and margins are needed for a reset. By the way this name traded last week (ripped 7%) it looks like someone ‘got the memo’ that LULU would beat the quarter. But we think it will be very conservative on guidance (particularly on profitability) which the market won’t want to see. We’re still short the name. We’d be more comfortable buying this name at about $250, vs $315 today.
On Holdings (ONON) | Taking higher on Best Idea Short list after EPIC squeeze. We’re going to be presenting a Black Book on Wednesday April 5th on this name, and specifically why we think it’s egregiously overvalued, and the Street is buying into a false bill of goods. The company put up an in-line-ish quarter, but issued a MASSIVE revenue guide for the year. To be clear, it needed to ‘go big’ on the top line guide, because inventory was/is up a staggering 195%. Management guided to a huge revenue ramp with the brand selling at a full price model the whole way through. That’s where we take issue. To it’s credit, it hasn’t had to discount product yet. But we don’t think that will be management’s call. The wholesale channel is getting pushed with too much undifferentiated product. Unlike Hoka and Nike, which are both controlling product flow exceptionally well – ONON is indiscriminately filling orders without providing exclusive colorways and platforms to key retail accounts. The bull case here is around Foot Locker, which needs an alternative to Nike, and is ONON is currently in less than 200 of FL’s ~3,500 doors. But be careful what you ask for. FL will be the first to BOGO this product once inventory builds in the channel, and we view that as inevitable. This stock currently carries a $10bn EV, and reminds us of when UnderArmour was growing too fast just under a decade ago. That didn’t end well, and this won’t either. We’ll go through our full investment thesis in our Black Book on Wednesday April 5th.
Dillard’s (DDS) | Moving Lower On Best Ideas Short List. Stock is down 26% since reporting earnings. The ‘slowly going private’ narrative took a hit with the company buying back ZERO shares in 4Q, it put cash towards a special dividend instead, which suggests even the company knows it’s stock is/was overvalued. We’re taking this lower on the list given the recent underperformance, but still have it on the Best Ideas list. Visits data is trending down mid 20s in recent weeks, we think you still have big demand and margin reversion risk while we admit there is potential for the model to settle out much better than where it was pre-pandemic. Something is helping near term trends, perhaps struggling competitors ceding share, and inventory being cleaner than most. As we run a DCF on our model we think you have a fair value in the $175 to $200 range, so call that another 30% to 40% downside, though we know the limited float presents a risk on short term price changes, hence the shift down on change in near term risk reward.
Bed Bath And Beyond (BBBY) | Moving To Short Bias List. Taking the win on BBBY. We think this is headed to bankruptcy, with a high likelihood of a liquidation, perhaps selling of Buy Buy Baby. But with the market cap going sub $100mm and a stock down 75% over 90 days, and 21% last week, we can’t see putting new money to work on this one unless it gets another senseless squeeze. The “failure threshold” for the equity deal with Hudson’s Bay keeps getting moved down as the stock keep breaking through the levels rapidly. Hudson keeps buying discounted shares with another $100mm due in April. BBBY keeps cutting costs, but business trend continue to look under pressure. Just this week a key competitor AtHome announced that it is cutting price passing through freight savings. We suspect we could see a filing here as early as summer, but TBD with the continued equity deal. BBBY staying on short Bias list.
Signet (SIG) | Moving Lower On Short Bias List. We remain bearish here on category reversion and earnings misses, but think there is less downside than before given sustained cash balance and earnings performance. We are building to $8 to $9 in EPS over a TAIL duration with the street at $11.50. We think this name will trade in the 7x to 8x PE range meaning the stock is likely fairly valued around the low to mid 60s or still 10 to 20% downside, but that’s less than we see across other names on our Short Bias list.
GameStop (GME) | Moving To Best Ideas Short List. With the stock rallying back around its YTD highs on a good 4Q print, we are elevating GME to a Best Idea Short. To be clear, there looks to be some good progress in the business turnaround here… the problem is with the stock in the mid 20s, you’re already pricing in a successful turnaround in the retail business offering, as well as decent performance in NFTs and/or an incremental services offering for customers. Below we’ve updated our valuation framework from back when we were bullish on the stock a year back, though with our former “Bear” tweaked to be a recessionary base case and our prior “Base” tweaked to be the recessionary bull case. There is a lot of business improvement baked into the current price, and still a lot of macro and execution risk in the interim to get to that type of fundamental performance and value creation. Additionally we think the P&L is likely to slow in 1Q23 as the consumer continues to weaken and visits trends look to be . That should be a negative multiple event. On the TAIL model we don’t expect to see positive EBITDA for ~2.5 years, and don’t expect annual GAAP earnings for about 4 years. We’d fade the strength, and think GME worth $8-$10 here in macro Quad4. We will keep it on a short leash from a timing perspective should we be getting out of Macro Quad4 sometime in the coming quarters where meme stock rallies become more likely. Could the turnaround work over a 5 to 10 year timeframe and generate value above what is outlined below. Yes, but you are betting on a low probability best case scenario and we think this short works over the near term.
Home Depot (HD) | Reiterating Best Idea Short Ahead of Conference Presentation this week. Check out our latest note. HD | This Is Just The Beginning. We’re reiterating our Short on HD even with the selloff on the latest print. The company printed a slight EPS beat, but with a negative comp. That’s the first negative comp in about 12 years. As a reminder, HD in the last housing downturn comped down 14 quarters straight. Yet the company is guiding to flat comps for 2023. It is also guiding to EPS down MSD%, while street was expecting flat. Operating margins to be down to ~14.5% (despite the freight tailwind) as SG&A investment will cause deleverage. Props to the company for investing in labor, as it should be, but this is a margin risk given our industry outlook. We DEFINITELY don’t expect the company to give an incrementally bullish outlook at the conference later this week. This slowdown should long outlive when we exit Macro Quad 4 roughly expected at the end of June. Best Idea Short.
Foot Locker (FL) | No Position – YET. We are very much inclined on the short side here, but are being patient. The company will be presenting at a consumer conference this week, and we expect new CEO Mary Dillon to come out all guns blazing about how she plans to sustain a 4-6% comp and lever that to 25% EPS CAGR over a TAIL duration. It’s simply not gonna happen. The Street has been getting bullish on this name, and even we took this off our short list three weeks ago ahead of what we expected to be a nose-bleed three year plan. But us getting back on the short side here is a matter of when, not if. The narrative around ‘Nike ties mending’ is a fallacy. Not gonna happen. The relationship might be better with new management, but Nike won’t take back up its allocations to Foot Locker above the 50% mark. And the only thing that will drive sustainable comp here is Nike going back to 60-70% of the store. Don’t hold your breath there. Will FL still get exclusive allocations? Yes, it’s an important wholesale partner. But we’re talking $120-$180 shoes, while Nike is focused on driving its digital business with $300+ price points so it can capture the full sale, instead of the wholesale portion. What Foot Locker does is simply in a secular decline. And Nike knows it. So do we.
Oxford Industries (OXM) | Sticking with this one short side. This name has been the bane of our existence, as we were early on the short. But the stock sold off massively last week on a 1Q guide down. But we don’t think it guided down enough for the year. It’s going up nearly impossible multi-year comps (just like the rest of retail) and should have guided down more. Importantly, it guided to where the Street is for the year, implying a hockey stick guide. Multiples don’t go up on hockey stick guides. We still think that management has too much ‘hope’ embedded in this guide, and that numbers are still going to come down. Sticking with this one short side despite last week’s shellacking. We think this stock trades down another 30% on lower earnings expectations – likely coming in the May earnings report.
