We’re hosting our weekly “The Retail Show” tomorrow, Tuesday 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
VF Corp (VFC) | Covering the Short -- booking the win. We added this stock to our Best Idea Short list in Feb with the stock at $29 – which some claimed was the bottom. We called for a sub $20 stock, and lo and behold, after cutting the dividend and putting up two sub par quarters with decelerating growth and eroding margins with inventory problems, the stock is sitting at $18.40. We think consensus expectations are finally close to the end of a bottoming process, and the stock is sitting at 8x reasonable earnings estimates. That’s a new trough for VFC. Could this drift lower to $15 during what we think will be a difficult summer for retail and the broader market? Sure. Trough multiples beget new trough multiples. But the upside/downside here is clearly more balanced. We still think the underlying brands – especially Vans – lack the momentum this stock needs to work on the long side. That’s going to take a lot of work for this company to fix. Retail turnarounds are tough, and this is definitely a turnaround. We generally are averse to betting on them long-side. But if inventory can get in check, and the company can fix its Vans problem we could build to a bull case of $3 in EPS power, which is probably good for a double from current levels. To be clear, we’re absolutely not making that call, and this company still has a balance sheet problem, with maturities every year for the next seven years. It’ll take a lot for us to be long this stock. But we definitely no longer see enough downside to call this a Best Idea – or even a Short Bias.
Capri (CPRI) | Pivotal report from Best Idea Long CPRI on Wednesday morning. The company already missed and guided down 13 weeks ago. And since then CEO John Idol bought $10mm in stock. We think it set reasonable expectations for this quarter, and are modeling a beat. But let’s face it, even when the company and Macro backdrop is positive, this company guides down the upcoming quarter almost without fail. This quarter should be no different. We like that it's reducing its department store exposure materially – from about 38% to something in the low 20s%. So regardless of the fact, and it is a fact, that department stores are suffering badly right now, CPRI fulfillment of orders will be even worse. We think its short-selling (ie not accepting orders) at the bottom half of its wholesale distribution channel. This is the right move for the company and the stock. The TAIL call here is that over a TAIL duration, Versace and Jimmy Choo should account for 40-50% of EBITDA, and there’s no way this stock trades at its current 6x multiple when that’s the case. We’d never in a million years argue a LVMH multiple on those assets, but could the consolidated company trade at a low teens multiple on much higher earnings numbers? Absolutely. This business should get a better multiple than TPR on real numbers – and that name trades at 10x a number we don’t particularly believe. This stock under $40 is one of the best risk/rewards in the group right now. As an added bonus, we think it’s a 90% probability that John Idol cedes the CEO role this year – which is probably good for a 20% pop in the stock given how much he’s hated by the Street. We ‘get it’ that stocks don’t trade on Sum-of-the-Parts frameworks, but how we’re doing the math, this stock is a triple over a TAIL duration, with $5-$8 downside in a recessionary Quad 4 melt down. The real play here is for Private Equity to buy this whole asset outright…sell Versace and Choo for 2x what CPRI paid, virtually funding the whole transaction. Then either run and milk Kors for cash, or sell it to TPR, which could run the Coach and Kors brands side by side without stepping on each other’s toes competitively. Are we nervous about another guide down? Yes. But the upside/downside and sheer value proposition is so heavily skewed to the upside over a TAIL duration that we’re sticking with this one – especially with the stock down 42% from the February highs.
Lululemon (LULU) | We debated pulling LULU off our Short Bias list ahead of this Thursday’s print, but are sticking with it. Granted, when the company guided last quarter it already had a third of the quarter in the bag, but the reality is that we think – like so many other retailers – the exit rate in the quarter decelerated sharply, and the company might not have cleared through as much inventory as promised, or the consensus believes. The market obviously knows this, as the stock is down 12% over the past three weeks. So it’s unlikely to implode on the news. But growth is slowing, inventories are likely still too high, and the company – even if it should beat – is unlikely to take up the full year guide. At 28x earnings, we’re comfortable hanging onto this short in light of what will likely be bearish commentary around the business – particularly in North America. 
Nordstrom (JWN) | The outlook is bleak for JWN on its Wed pm earnings print. During the quarter the company closed its San Francisco store and began liquidation on its Canadian stores, which are set to close by the end of June. Last quarter the company had revenues down 4%, with Nordstrom down 2.4% and Nordstrom Rack down 8%. Whether the company isn’t inventoried in the right items or it just isn’t attracting customers, it doesn’t bode well for the company to have sales down 8% in its off-price banner when the consumer is under pressure and looking for deals. Just look at the comps at TJX and ROST. The company guided to full year 2023 revenues of down 4-6%, with 1H compares harder than 2H. The exit from Canada is expected to have a 250bps negative impact on revenue but will have a positive benefit on margins. The Street has hockey stick revenue estimates for the year, starting down 12% to up 3% in Q4. The hockey stick idea is probably right, but we think it’s set too high. We think things are going to be worse here for longer than is expected. Remember that ~100% of EPS power right now comes from Credit Card income, and that’s been cracking for key comps and competitors. This short has worked for us, but we still think its worth about $10 vs its current $16.
Chewy (CHWY), Long Bias | Reports earnings Wednesday after the close. We took this off of our Best Ideas Long list in early February given the stock rally and the fact we thought we’d see a period of stalled customer growth. Last Q confirmed that view. Though in that quarter CHWY still put up some of the best top line growth trends in the entire ecommerce space, up 13% yy, we can’t think of an ecom platform of size that is putting up that kind of end sales growth. Most have seen flat to negative growth. Online interest trends for CHWY look to be getting slightly better, though the quarter to be reported looked weak, and we’re not seeing a material acceleration in the last couple months. The closer we get to the international launch, likely coming around 4Q, the more likely we are to get more bullish as that adds a significant bump to customer and revenue growth. 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. With the stock around $30 those taking a TAIL view can start to nibble long side playing for at least a double over that duration, however with this being a high multiple stock in a continued challenging consumer environment in Macro Quad 4, we would not be loading up for the event. Withing a few Qs we expect to get a setup with a higher probably of sustained acceleration in the growth trend and making for a better time to be outsized long this stock. 
Gildan Activewear (GIL) | Moving From Short To Long Bias. We’ve been long and short GIL in the past. We added GIL short side in April 2022 with the stock around $36 calling for downside into the high 20s. Stock is now around $28 so for the most part the short call has played out, but more important than the prices is that we are likely lapping peak YY cotton inflation pressure hitting the P&L, and the new plant in Bangladesh is ramping up driving top line growth making for a high probability of business acceleration over a TREND duration. We are lapping some bid de-stocking by top retail partners in WMT and TGT, though that doesn’t necessarily mean a big restocking event to come as retailers try to stay lean and nimble given the pressure on consumer discretionary spending. Also, management is talking about incremental retail program wins that will support growth in 2023, though without specifics and qualification, we’re not banking on it.
The TAIL setup for GIL is relatively simple. The competitive moat is that GIL has built up large scale basic apparel manufacturing facilities driving the best fixed cost leverage making it the lowest cost producer of basic apparel in the world. That edge will allow GIL to win business in retail Private Label programs as mass retail wants to continue to invest in Private Label brands. At the same time the screen print industry is shifting more and more to fashion basic tees, as opposed to old tube tees. The new style shirts are higher priced, but not much more costly to make. Meaning ASP and margin lift on continued industry mix shift. Lastly is driving share in international markets, which the Bangladesh facility is specifically catered to do. If we think about GIL from a cyclical perspective, although its end markets of consumer retail and corporate promos will see end demand pressure in a slowdown, being a low cost leader enables GIL to carry a strong value proposition in recessionary environments. Historically the time to own GIL is when new factories are opened, as it means accelerated growth, strong incremental margins and potential SG&A leverage. Though on the latter point, given how much this company cut SG&A during the last few years, we’re modeling limited upside here. GIL stock is currently trading at a trough 9x PE and 8x EBITDA. Lookout out, we see EPS of $4.50 in 2025, with the P&L accelerating we think you can get back to a low to mid-teens multiple here, meaning a stock in the high 50s to low 60s or 2 year double or better. GIL is likely to move up our long list as we de-risk the near term macro environment (by letting it play out) and drive research conviction on the growth drivers in NA and international.
Burlington Stores (BURL) | We debated taking this one lower on our Short list given that it’s -31% from its YTD highs. But the reality is that the company put up a terrible quarter, and we still think it’s a great pair against Best Idea Long TJX. BURL trades at 25x earnings, compared to 20x for TJX. People argue that BURL earnings are depressed, while we think they’re permanently broken. BURL is going the wrong way on its inventory growth, buying too early and packing away too much for next season instead of being in ‘chase mode’ like TJX and ROST. TAIL estimates have BURL going up to $4.40, while we’re closer to $3.50. We think this stock will continue to drift lower, despite its underperformance, as it still has a lot to give away on the multiple – and don’t see a business catalyst to drive it higher.
