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.
Live Video Link CLICK HERE
Key Retail Theme: If you didn’t pick up on it in last weeks earnings results, 75% of the companies in Retail missed and – beat or miss – 95% of companies put up a decelerating growth algorithm, with sequentially slower sales, margins and EBIT. This is happening when we’re looking down the barrel of the toughest 3-year comp stack for consumer discretionary (particularly products over services) this entire cycle. Redbook sales (captures 80% of census Retail Sales) and store traffic are seeing lower lows and lower highs. We expect the retail earnings season for the quarter that ended last week to be littered with SEVERE guide-downs. As much as we want to look through the event and pivot long, we’d rather be right – and with Street expectations for 55% of Retailers to post yy earnings gains with a hockey stick in EBIT growth to 24% by the end of this year, we think numbers are just flat-out too high, and need to come down. We’re building our shopping list – with names like RH (which we’d own today), CPRI, NKE (gonna smoke numbers in the May quarter), DRVN, VVV, DECK (though would start to peel some off as the stock is +96% over the past year since we made our call), but the reality is that we’re still more comfortable with 2x the number of shorts than longs right now. Perhaps that changes when consumer comps ease this year. But we think that retail management teams are tired of nickel and diming with downward guides, and that more sizable guide downs are in the cards in the coming months. Not a good time to be overweight retail. We’re getting closer…but #patience is important here. 
Wayfair | We’re tempted to make this a Best Idea Short again given the 30% squeeze last week. But we’re gonna let it breathe (we took it off Best Ideas at $37.50 after going short at $270). Two things we don’t like about the setup. 1) The company guided to positive EBITDA in the 2nd quarter. That’s predominantly coming from cost cuts. This company is eliminating every cost that’s not nailed down, and that’s no recipe for success for a consumer company – especially a pseudo growth story like Wayfair. It doesn’t end well. 2) Guidance calls for a ~10% growth rate in sales for the quarter when the first month of the quarter is running -HSD. The company cites ‘easy comps’. First off, for companies like W, easy comps beget easy comps, especially when it’s eviscerating its cost structure. But most importantly, the consumer is facing ridiculously difficult comps, which does not appear to be in W’s forecast. Our best is that Overstock (OSTK – Long Bias)’s stock price ($20) and Wayfair’s ($40) cross over the next 12-18 months. Great pair trade here.
Revolve (RVLV) | IMHO, the stock did not sell off nearly as much as it should have on last week’s print. We’d press this one in the high teens. This should be a $10 stock. The company failed yet again to add over 100K net new customers, and the rest of its KPIs looked underwhelming. Inventories are still out of whack, but showed sequential improvement – that’s the ONLY positive in the quarter. But our sense is that inventories are building again as new customers come on at a slower rate, place fewer orders, and spend less per order in the revolve brand. Remember that student loan payments are back – to the tune of $350/month, which comes right out of the core Revolve consumer. We have this company earning $0.50-$0.70 over a TAIL duration, and if we’re generous with the multiple on the RIGHT earnings, we get to a stock 40-50% below current levels.
Etsy, Inc. (ETSY) | We’re been short ETSY since $280, and it now sits at $90. We still think it’s headed lower. We think that this name could fall as low as $60 – at which point we’d likely pivot as this is a good model long term. But our sense is that ETSY will ‘surprise’ investors in the coming quarters with yet another seller fee increase – which we thing is outright reckless. This company should be finding a way to get more buyers on the platform, having missed estimates by 5mm users in last week’s quarter. We think that the optics of another increase so soon after the one it’s about to anniversary in 2-months would cause revolt by the seller community, and would not be well received by the street. For our note on ETSY’s quarter click here…
ETSY | Slight Beat, But Slowing. Slowing GMS, new highs in churn, EBITDA in decline, will be lapping the seller fee increase within 2 mos = growth is likely to slow more. Fair value here is closer to $60.
UnderArmour (UAA) | Short Bias list. Tuesday’s print could go either way – if it trades above $10 its likely a Best Idea Short -- again. Make no mistake, this business is in trouble. But UAA loves to guide down and beat. While you can manipulate the Consensus, you can’t really manipulate the trajectory of the brand or the margins that come with it. And all indications are that the brand is slowing – not just because of Macro, but because prior management committed the cardinal sin of trying to cut costs to profitability, and lost all brand heat in the process. Mind you that last quarter UAA beat by 20%, but earnings were still down 48% yy. This quarter the Street is looking for EPS of $0.16 vs a loss of a penny in last year’s March quarter. Not exactly a slam dunk. Longer term, we think UAA is worth about $5 vs its current $8.50, and will likely use any strength around the quarter (if it materializes) to add it to our Best Idea List. If the new CEO is worth her salt, she’ll quadruple the R&D and marketing budgets – even if it means losing money. This used to be a super relevant brand, and now its almost as dead as Adidas. In this business (and most of retail) you have to spend money to make money. As I said with Wayfair, the cost cut game just does not work long term. I’ve been getting inbounds by investors looking at UAA long side ‘bc it looks cheap’. But I wouldn’t call 14x earnings cheap for a share losing brand. Its closer to being right than the 25x multiple when we shorted UAA, but the numbers still look too high for us if this company wants to get a ‘footwear growth’ multiple – and the only way to get that is with a major earnings rebase and stepped-up capital program. That’s not likely to happen, which leaves this in sub-$10 purgatory for a while. Above $10, it becomes a Best Idea Short for us – again.
Wolverine Worldwide (WWW) | Best Idea Long WWW out with earnings this Wednesday. The Street’s looking for a 90% earnings decline yy, so we’d be surprised by a miss. Reminder that this is a ‘Pod 3’ story – meaning that the company is fixing its balance sheet by selling assets, improving working capital, and then delivering and investing in its brands to reaccelerate top line (Pod 1) and margins (Pod 2). These kinds of stories take time to play out, but they can be some of the most powerful long calls over a multi-year period. We think there’s $3-$4 in earnings power here over a tail duration – which is probably worth a 13x multiple. That gets us to a $45 stock with it currently trading at $15.
Canadian Tire (CTC.CA) | Best Idea Short Canadian Tire is out with earnings this Thursday. We’re expecting a guide down. The biggest driver is that the company is under-reserving for bad debt and delinquencies in its credit card portfolio. The second reason is that the productivity levels in the store are still 30-40% higher than pre-pandemic levels, with an incrementally stretched Canadian consumer. This stock looks ‘cheap’ and every Canadian long only manager loves to own it. But we think they’re going to go down with the ship. This company is over-earnings even more than most US department stores.
Tapestry (TPR) | Short Bias – Looking for an in-line print but a guide down on Thursday. Simply put, we think that the portfolio here is inferior to Capri. Kors vs Coach is likely a push. But CPRI has Versace and Jimmy Choo – both luxury brands. While TPR has Kate Spade, which is not a good business – been a $1.3bn brand at a single digit margin for 7-years. And it owns Stuart Weitzman, which is good, but only 3% of the portfolio, and has been discounting heavily this year. The one thing TPR has going for it is that only 3% of Coach sales come from department stores – concern around which has taken CPRI to a 52-week low. Coach has done an admirable job in taking down the age of its core customer by a good 20-years (something Ralph Lauren is trying to emulate and we think it will fail). But it’s lost older customers who have more discretionary income than 18-35-year olds have right now in Macro Quad 4 (note student load comment mentioned with RVLV – same holds true here). While we like the growth at Versace and Jimmy Choo at CPRI, the problem is that the ENTIRE cash flow stream rests on the Coach brand. And while it looks better and more aspirational in recent years, it’s still in a tough macro backdrop. If Coach comped up 5% or down 5% we wouldn’t be surprised either way. The brand heat isn’t translating to consistent double digit top line growth – what we need to see to back this name. If I were a banker, I’d get CPRI bought outright by a P/E firm (at a 30%-40% premium), sell Jimmy Choo and Versace to LVMH or Kering – which would fund the whole transaction. Then would either milk Kors for cash, or sell it to TPR, which would run both competing brands without stepping on each others toes. It’s a head scratcher why this deal hasn’t taken place. Either way, we like the CPRI Long/TPR Short trade here.
The RealReal (REAL) | REAL is on our Best Idea Long list for many reasons – Earnings on Tuesday. We calculate the EV of this company at about $200mm (the market value of the debt is half the book value), which is a joke. The replacement value for this infrastructure and brand pushes $1bn. With the company, under the new CEO) likely to turn GAAP earnings positive in early 2024, there’s a clear catalyst. We think the ‘trade down’ effect is helping REAL in Macro Quad 4 – though should note that as part of the company’s effort to clear out goods selling below $150 (a good move to improve margins and brand allure) there could be a negative GMV hit this quarter. This is a prime asset to be taken. EBAY is delusional in spending 3x the capital to build this platform organically – which will be eBay branded, and will play second fiddle to REAL. In the end, we think you have positive ‘trade down’ dynamics at play this quarter, with a big call option on it being bought (like Poshmark was) but at a materially higher price than the current $1.15 call option it’s trading at today. If you can go way down the cap curve, you should be picking up some REAL here. This is a multi-bagger over a TAIL duration.
Allbirds (BIRD) | Needs to be acquired. This has name has been a loser for us, which pisses me off. I’m not going to hide from it though. The EV of this company stands at a bone-chilling $36mm (market cap of $200mm), which is just staggering. No debt, plenty of cash – but yes, it’s losing money so the cash will only last so long – another 2-3 years by our estimate. Like most brands, sales likely to decelerate on Tuesday’s print, so this is not a ‘trade’ into the quarter. But this name is ripe to be bought by Private Equity, even though that company has made material changes in its product and marketing organizations, as well as at the Board level. The fix here is simple – close expensive stores – or at least don’t open any more. And aggressively push the wholesale model – not to the reckless level we’re seeing at ONON – but more like the controlled push we’re seeing at HOKA. That will push this company into profitability sooner than anyone expects, and the P/E sponsor could take it public again at 10x the value it trades at today. This one is not for faint of heart, but I think the likelihood of a takeout by P/E or a major activist shareholder is something that can’t be ignored.
PLBY Group (PLBY) | Speaking on ‘faint of heart’ how can I not comment on PLBY’s earnings this coming Wednesday. Let’s be clear about one thing here, this quarter is CEO Ben Kohn’s last ditch effort to justify his existence as CEO. Maybe he’s got two quarters, but the clock is ticking fast. The new CFO is also taking on a COO role – meaning that he’s running the entire company. That’s a plus. 100% of Kohn’s time now is being spent on CENTERFOLD. If it fails to make meaningful progress in KPIs and cash flow in as little as 6 months, he’s gonna be shown the door. In addition, the company has reportedly hired a banker to sell Honey Birdette. We’re mixed on that one, bc it’s a quality asset that belongs in the portfolio. But more important is that this company is debt free, and that’s what a HB sale would give the company – a perfectly clean balance sheet. Then it sees a ramp in its licensing revenue with the Li & Fung partnership (which flows 100% through to EBITDA), and there’s a dramatic change in the perception of this company. Solid balance sheet, guarantees royalty payments, Kohn gone – all of that could literally happen within six months. Does this stock have the upside we once thought it did? Of course not. Been the worst call of my career. But I’m keenly aware that some of my subscribers still own it (at a substantial loss). Now is definitely not the time to be selling this stock. The catalyst calendar is ripe in 2023 – and like REAL – it’s trading at about a 25-30% of liquidation value. This company is NOT going bust, though the stock price says otherwise. I still have this on my long bias list (at the bottom – but it’s still there).
ThredUP (TDUP) | Earnings out on Tuesday night. We’re bullish into the print. This stock is up 200% since the November lows, and is hitting higher highs and higher lows. We think that’s because a) resale is doing well in the trade-down environment – aside from the fact that this is a sector of the industry where TDUP has no scaled competition, and b) the company has been aggressively signing RAAS (resale as a service) deals with new partners. No self-respecting brand isn’t exploring resale given the long term tailwinds – and most are outsourcing – predominantly to TDUP. Losses from last year should moderate meaningfully this year, coming largely from added revenue on a largely fixed cost infrastructure. This name is on our long Bias list, though as the RAAS initiative gains momentum, losses dissipate, and consensus numbers are revised higher, we’re likely to make this a Best Idea.
Interparfums (IPAR) | Best Idea Short IPAR reports Tuesday. This company has put up strong results the last few quarters, in line with the rest beauty. We still don’t love the licensing aspect of this business, and the overconsumption of beauty with reopening (which we still believe will roll) and isn’t sustainable long term. On the Q4 2022 earnings call, management did say expectations are for continued growth in 2023. Especially with the additions of more upscale designer brands (Ferragamo, Donna Karan, DKNY, Lacoste). The company said that it expects negative impacts of FX to impact results. While FY22 ended +24%, Q4 was up 47% YY. So while the Street expects sales growth of about 25%, the company could very well do that. The Street has gross margins basically flat for this quarter, and sequentially improving for the remainder of the year, settling at a new higher margin. That’s where we have a problem. There’s nothing – aside from stronger volumes with category strength – that has changed here to give this company a permanent 300bp-400bp margin lift. That’s in consensus numbers in perpetuity. The Street is also modeling record high EPS of $1.10 for Q1, 26% above last year’s Q1 EPS. That might be doable, which is a plus given that this is a good Quad 4 performer. But if this print goes against us, we’re going to need a VERY good fundamental reason to not take this higher on our Short list.
Olaplex (OLPL)| Another beauty company reporting this week. We’re likely to short it in the event of a pop. This one with truly abysmal expectations, overall sales down 41% decelerating from down 22% last quarter. The Street is following management’s guidance of Q1 being the worst performing quarter and getting back to sales growth at the end of this year. Let’s not forget back in October when this stock blew up in one day and lost about 50% of its value. Margins are expected to settle out at a lower than historic rate, which makes sense given that gross margins were historically in the high 70’s and operating margins were in the mid to high 50s, now the mid to low 70s and the mid to low 40s, respectively. While it would be tough for this company to put up a worse quarter, sales wise, than expected this coming week, we think that the sequentially improving expectations for the year are ambitious. It may be “easy comps” but this company got hit hard in the market place and people lost excitement and interest in it pretty quickly. Google interest trends have been consistently negative since August 2022. This brand has a lot of work to do before it can truly get back to strong growth. Not on our idea list, but if it rallies on the print we’re inclined to short it.
