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 Will Be Sent
Retail | Bone, Bagger or Bust 2.0. Presentation on Friday May 12th parsing through single digit stocks in retail – looking for BKs and multi-baggers over a TAIL duration. 50+ tickers we’ll be vetting include DXLG, ROOT, TLYS, SFIX, UAA, ARHS, KIRK, TCS, COOK, COTY, CRCT, JOAN, NLS, QRTEA, PTON, VRA, LVLU, FIGS, DTC, WOOF, TTSH, SPWH, RENT, MCW, LL, LE, HBI, FOSL, GRPN, GPS, FTCH, DLTH, DBI, CONN, BRLT, BODY, BNED, BIG, BGFV, MYTE, EXPR, OLPX, PLBY, BIRD, TDUP, PRPL, REAL, PRTS, AKA, CURV, CHS.
Kering (PPRUY) | Booking the win Long side. Taking this one off our Long list. We took this one lower on our long list (swapping with LVMH, which we moved higher) ahead of the company’s results. And while they came in mildly ahead of expectations, we still saw the Gucci brand (~80% of cash flow) grow only 2%. That compares to Hermes and LVMH putting up mid 20% growth rates. We added PPRUY to our long list at 14x earnings with the ADR at $50. Its now 26% higher at $63 and change. We’ve seen no change in fundamentals and the brand continues to cede share despite the reopening in China. Estimates have gone higher, and the multiple re-rated by 20% -- all on underperformance. To be clear, our call on Kering is that there’s a new Creative Director at Gucci that is likely to take the brand back to its luxury roots, nix the collaborations with lesser brands, and regain its footing as a real luxury brand. But the product from the new CD won’t hit the shelves until a year from now, which is a career away. And the stock has already re-rated. The biggest negative is the other brands, especially Botega Veneta, which absolutely tanked the upcoming quarter, surprising that its out in place 20%+ price increases on much of its assortment. There’s fallout from the marketing gaffe at Balenciaga this past fall when management (who blessed the borderline pornographic campaign) turned a blind eye and blamed the ad company. The brand is being boycotted, and that might not turn for 1-2 years. All in, we had an opportunistic point in time where a lot of bad news was priced into the stock, we picked it up at 14x earnings, and we think near-term upside is capped. This is now a show-me story, and we don’t want to load up on those long side in Macro Quad 4.
Wolverine Worldwide (WWW) | Moving Up To Best Idea Long List. This stock is up 24% since we added it to our Long Bias List in January, and the same call still holds, though we’re gaining confidence in the underlying research. This company is shedding non-core assets, freeing up working capital, reinvesting in the brands (like Sperry, Wolverine, Merrill, and Saucony, among others), and most importantly, gearing up to be a big de-levering story. We get to better than $3 in EPS over a TAIL duration, which is good for a 12-14x multiple. That’s a two-bagger from its current $16. Though we don’t make fashion calls, it’s worth noting that boat shoes are making a comeback this Spring, which should be particularly bullish for Sperry. We hate making fashion calls, that’s why we don’t make them. But we’ll take the tailwind. This is the only retail stock that has positive Signal Strength in Keith’s weekly ranking of all of our names.
Prada (1913-HKG). Adding to Long Bias list in place of Kering. Yes a dreaded numeric ticker. The worst thing this company ever did was list in Hong Kong. But we think a dual-US listing is in the cards – perhaps within the next 12 months. Prada is a classic family-run business, but one where the creative director is no longer the CEO. It’s finally being run like a business, where creative can spend time on creative, and the CEO can actually move forward with a strategic plan to accelerate growth globally and take up mid-70s Gross Margins to over 80%. We think this is both a top line and margin story – and one that should get much more attention as its shares ultimately trade in the US. The stock might not look cheap at 25x earnings and 11x EBITDA, but we’d argue this business could re-rate by 30-40% as the business gains momentum. As background, this is largely an accessories company with leather goods (where we’re bullish) at 50% of the mix. Then ready-to-wear at 29%, shoes at 18%, and Other at 3%. It has an extremely geographic mix, with Europe its biggest market at 33% of total, but US quickly climbing. China is a big market for Prada (86% of revenue), Miu Miu (12%), and then smaller brands are pretty much a rounding error. We like the focus on one powerhouse brand here. We’d caution not to look at historical margins, for in doing so it’s tough to build to upside. You need to look at a perennially undermanaged company with a professional CEO that can take this business to new highs. Definitely a Best Idea Long candidate for us. We could see this name trading at 35x earnings over a TAIL duration on much higher earnings numbers, suggesting 50+% upside. More work to do on this one, but based on our research process so far, we like the upside potential – especially once we exit Quad 4.
Aritzia (ATZ) | Earnings out this week – Tues PM. While we love so much about the company and its operating strategy, if we had to pick a direction, we’d be short the stock this week. There are few things we don’t like about this company, its growth strategy, merchandising strategy, and extremely controlled manner in which it grows its store base and builds consumer connectivity among a wide demographic. But in running our SIGMA Book last week, ATZ had by far the worst inventory to sales position exiting last quarter out of any retailer we cover (perhaps with the exception of Canada Goose). That by itself is not a disaster, but the consensus expectations are for margin degradation to worsen at a sequentially more bullish rate in the upcoming quarter. We think there’s risk to the downside here over the near-term. We don’t want to be wrong over a TRADE or TREND duration just because of our bullishness on the TAIL. When we de-risk the upcoming 1-2 quarters for ATZ, it’s highly likely to make it back to our long list – potentially as a Best Idea.
Revolve (RVLV) | Best Idea Short RVLV out with earnings this Wednesday. There’s so much wrong with this model. The stock has been weak over the past month, suggesting that the high frequency data isn’t painting a bullish picture on current trends. That’s in the stock, but we’re not sure the guide-down we expect in the quarter is. The first metric I’m going to look at in the quarter is net new customer additions, as we think the company is dangerously close to penetrating its TAM and is relying too heavily on repeat customers, who likely have less discretionary income than they did at this point last year. The company is building a DC just for pack-away inventory, which runs polar opposite to the spirit of its model to have shallow and narrow inventory buys of ‘must have’ product. We’ve also seen discounting levels elevated over the past quarter. This name is likely to earn about $0.50 in perpetuity, and yet it trades at 24x EPS and 13x EBITDA on expectations that are too high. We’d give this model a low teens multiple over a TAIL duration on $0.50 in earnings, which puts it closer to $10 vs $23 today.
Acushnet (GOLF) | Though we’re short this name, as we think its trading at a peak multiple on unsustainable earnings, we’re expecting mixed results into Thursday. Online interest trends for ball and clubs look pretty solid so far this spring. Don’t think we’re going to see a big miss/guide down yet.
Inventory levels were high last Q, so will be interesting to see that trend vs sales this Q. Prob need to compare both vs 2019 levels. YY obscured some by shipment issues. This is purest play on golf were we have peak participation, just coming off peak rounds played, with peak consumption in the industry, peak margins, and an elevated multiple with inventory building.
Last move on pos mon CLICK HERE
ETSY (ETSY) | Best Idea Short – Growth Slowing and Multiple World’s Ahead of Peer Group. We’ve been short this name since $280, and at $101 we still think there’s 30% downside. It’s an adj EBITDA company so that’s the line that mattrs more than EPS… and course revs matter too. They don’t really miss guided numbers (rev and EBITDA), so anything inline to miss would be very bearish. Guide somewhat conservatively and talk down numbers mid Q had been the MO. EBITDA has been boosted by SBC add back rising, so keep an eye on that vs the EBIT change YY. Online interest looks to be weakening, have seen similar commentary on CC data. Its main category is home/décor, where W and OSTK are getting promotional and demand is under pressure. See our latest note for full thesis.
ETSY | Buyer Beware
Monthly (acceleration since 4Q reporting season, ie when guided 1Q, though 2 year weakness)
Google trends looking bearish for ETSY
Mister Car Wash (MCW) | Long Bias List – This print on Wed could go either way. But perhaps the last shoe to drop before a Pod 1 inflection. We’re beginning to get very constructive on the name. The timing might not be right to make this a Best Idea given Macro headwinds on a discretionary expenditure, but we’re getting closer. The company is rolling out its Titanium 360 premium wash service which is likely going to start a subscription pricing upcycle in 2H23 – setting up for a big 2024. While we’re the first to admit that shifting the consumer higher in price does not synch with the Macro climate we’re in, the reality is that this company has not raised price since 2014, and is materially below National competitors. We have more work to do on this name, but the greenfield and fold-in (a nice word for roll up) strategy here gives this company square footage growth for well over a decade, and to its’ credit, the subscription service as a percent of total has hung in better than 70% -- even over the past year when people had every reason ditch discretionary items like car washes. We think that if that part of the model were to crack, we’d have seen it already. We get to preliminary EBITDA for FY24 close to $400mm, with the Street at $320mm. If that number proves right, this stock could double from its current trough 13x EBITDA multiple. Again, more work to do on this one. But the story is shaping up nicely. If we see a disappointment on Wednesday night, we may go Best Idea Long on a sell off.
Wayfair (W) | Consensus expecting rapid improvement in sales trends with 1Q being new RoC bottom – we don’t buy it. That comes with rapid margin improvement such that EBITDA margins are flat by 2Q and positive in 2H. We’re more bearish on demand, more bearish on margin recovery as the company’s gross cuts will have less flow through than expected, while also hurting top line.
Home retail end demand not going to get better in 2023. Also, as outlined in the chart below, our promo watch from RandonWalk suggests an exit rate in the quarter that is highly promotional.
W | Do You Believe?
Arhaus (ARHS) | Beware of demand comp on Thursday Morning. We moved this name to our Short Bias list from Best Idea when it hit $7 two weeks ago. We think upside/downside is getting more balanced (but upped LOVE to Best Idea short – which we think has far more problems and challenges ahead. We kept this a Best Idea short even after a big selloff post the 4Q print and guide of 2023, but ARHS is down another ~$2 (or 20%) since, and down 9% this week even with a sell side Buy initiation. The risk reward is getting less attractive with the stock down to $7.50. We think this is a mid single digit stock for a long time, with earnings power around $0.50. The company margins seen over the last couple years are not sustainable, and much of the revenue in 2022 was actually due to satisfying a backlog of demand from late ‘20 to early ’21. Staying on short bias, as we think it has another 20% to 30% downside risk. We think 2H revenue performance could still disappoint given the underlying demand comps will get worse than the company thinks. In small cap home furnishings land we like LOVE more short side.
Leslie’s (LESL) | We’re bearish on the Pool ecosystem and think that the installers and supplers are overearning. LESL is interesting here into earnings. Not quite as expensive as POOL (but still at 13x earnings – when a single digit multiple is by no means off the table) , but has a far less defendable moat. Competing this year against WMT, which was largely out of stock with pool chemicals last year, and for some reason we have yet to understand, its leaning into inventory more heavily into the Spring. Yes, there’s a higher installed base of pools – but only 5% pre-pandemic, and we think banking on passing through inflation is a risky proposition here, especially with the inventory build. We think we’re getting to the end of the stock downside for LESL, as it’s down 35% over the past 3-months. But we don’t like how it’s leaning into inventory at a time when competitors finally have supply. Seems like mistake that could result in weak GM and a guide down for the year. We previously said it downside to $8-$9. But are now inclined to see downside to $7 based on lower numbers. In a dangerous position in the SIGMA analysis.
Floor & Décor Holdings (FND) | It’s Game Time for FND on Thursday night. We have this as a Best Idea Short, along with HD and LOW (with LOW and HD as our favorites, in that order). We think that Pro labor has been a big backlog drag for these companies over the past two years given the housing churn in 2020 and 2021 – and people tend to do home projects within 2-years of buying a new home. But according the SHW CEO last week, the Pro Labor market is starting to normalize, which is likely to make the demand com equal to the reported comp – ie headed lower. To be clear and accountable, while LOW and HD have been winners for us so far, FND has not. When we went short, estimates for the year were at $3.36, and not they’re at $2.55. And while that change happened the stock rallied by 25%. This is a battleground name that people seem to want to own and are comfortable looking through near-term pain. Do we think there’s another guide down left? Yes. But we’re not sure the market will care. This is likely the first name tied to the Home that we pivot on when we can identify a positive rate of change in demand and margins. It should be touch and go for a couple of quarters, including this one. But we’re going to stick to when we think will be slowing demand trends, with the stock trading at 35x earnings (note it has traded as high as 60x), and likely downside from here until we pivot on the name. Once we see a demand upcycle, the multiple could radically re-rate on upwards revisions. We just don’t think we’re there for another 2-3 quarters at a minimum. Until then, its expensive with earnings risk. That hasn’t worked to far on our call, but we’re not to capitulate ahead of a likely guide-down and dicey results for much of 2023. We still prefer being short LOW and HD which don’t have anywhere near the long term runway FND has. Again, this is a quality business we want to own at a price.
ULTA | First negative datapoint we’ve seen on the space in a while. Traffic decelerated sharply last week in Beauty, including ULTA.
