TCS | Big Guide Down, Huge TAIL Potential

TCS with a beat headline EPS on margins better than expected with weak revenues.  The absolute performance this Q is indicative of the bearish home consumption environment with comps down 13%.  The company is foregoing some sales and protecting margins skipping a sale event as it doesn’t think chasing sales in a weak demand environment will have quality returns.  Gross margin was up 190bps with lower freight and better mix with some promo offset. The company is rebasing 2023 expectations significantly, with a Big guide down of comps and wisely so. As we noted in our preview this weekend, the home space, particularly with a BBBY liquidation, is going to get worse before it gets better.  Full year adjusted EPS is expected around 25 cents at the midpoint (street was at $0.65), with comps guided to down mid to high teens.  Management is cutting costs including reducing headcount and guiding to an SG&A rate just under 50%.  The company pushed out a few store openings slightly that were planned for this year, so the guide is 6 new stores instead of the prior 9 estimate, with three moving to early 2024.  With demand as weak as it is currently, this is a prudent move.  The comp guide seems conservative for the full year, but 1H can definitely see the down ~20% range that is being guided in 1Q.  Our long call on TCS has been wrong as macro has pressured demand/earnings, and bad style factors have continued to pressure the valuation.  However, as we assess the story from here we do not think this is the time to sell, rather we think the risk reward is staggeringly bullish.  With this big guide down, earnings expectations have likely bottomed.  Revenue rate of change will slow this Q, but we should be seeing that bottom and improve sometime this summer.  Liquidity is in check with $107mm in liquidity available and the potential for free cash generation this year despite the big guide down.  We think the consumer value proposition continues to have relevance post pandemic, and it is a category that is hard to shop easily online.  Management is sticking with its long term store opening and margin targets of 76+ new stores and low double digit operating margins.  If the company can achieve even half of that we think this is a raging long here in the low single digits.  We’re only modeling HSD operating margins and have 2025 EPS around $1.50, and longer term earnings power of $2 to $3.  What is the right multiple on this unit growth story?  Right now it’s trading sub 10x on what looks to be troughed numbers.  We think a teens multiple is right on our out year numbers suggesting a stock that has the potential to go up 10x over a few years.  With Leonard Green still owning ~30% of the stock we can’t rule out this company going private to ride out the recession and come back to the public markets in a few years midway through the store growth ramp.  Let's not forget the company does have $25mm in repo authorization remaining as well.  This is a stock that we’ll highlight in our Bone, Bagger, or Bust call next Wednesday, but we’re clearly leaning towards the Bagger camp on this one.