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
We’ll start with a key callouts from Retail earnings season – that’s finally coming to an end. The punchline is that we were expecting well over 20 companies to put on their ‘Macro Aware’ hats after nickel and diming guidance cuts for 2-3 quarters, and finally take a material (40-50%) cut to this year’s earnings. We didn’t get it. The number of material guide downs were few and far between. With the exception of RH (Best Idea Long), TCS (Best Idea Long), FL (no position), AAP (which we went short last year, and though it was a win we weren’t there for last weeks implosion), Macys (see below), and perhaps AMZN (only looking ~2 months out), there were few companies that really took down estimates to beatable levels and contextualized the real US Macro risk contemplated in the guide. And that’s amid a backdrop of credit tightening, personal savings rate rising (fear index), heading into an ugly employment cycle, and student loans biting the consumer across the demographic spectrum in two months. We hoped/planned on this being a period where we can start to get constructive on retail after being massively short for the past 18 months. But given the lack of guidance/consensus reductions, we still think its too soon. We think it is highly likely to come crashing down – even with XRT having made new lows (lows beget new lows) – around the August reporting season (capping off with a bearish Goldman conference in September), which should be a bloodbath, and come with commensurate guide-downs – not just 5-10% -- but closer to 30%. We want to be bullish on retail, but more importantly we want to be right. And the right call today is to still be short the group. Shorts outweigh our longs by 2 to 1, and as we’ve stated before, many of our longs are still likely to head lower over the summer – creating astounding buying opportunities.
GameStop (GME) | Moving Higher on Best Ideas Short List With Earnings this Wednesday. Expectations are for just a slight slowdown in sales trends (~140bps reported $) while US store visits (below) look to have slowed about 4 pts in 1Q, and May trended similar to the 1Q average. Street expecting big margin improvement, which is feasible given the cost cuts and trending mix help seen last Q. Growth compares get a bit easier in the middle quarters of the year, though new GME management doesn’t guide, so we shouldn’t get any kind of outlook to acceleration. We tend to be believers that a turnaround here is possible, yet the market has already priced in a reasonably successful turnaround, before it has happened, and is doing so in the middle of a move into US recession and a Macro Quad4 market. Meanwhile the consumer is facing intensifying pressure, and business trend look to have slowed down in recent months. We’ll stay short that here with higher conviction, though still expect volatility on the original meme stock. We see stock downside risk to $10 vs current $24.60. 
Hibbett Inc (HIBB) | Taking Lower on Short Bias List. Stock has been cut in half over the last 90 days. With that kind of move, we are risk managing the short call, but still don’t think the earnings downside is done here so it is staying on the short side of the ledger. HIBB put up an ugly quarter a couple weeks back shortly after FL’s big guide down. 1Q earnings missed and management gave a big guide down with full year revised down about 25%. Despite the company having so much confidence in sustainability of pandemic gross margin gains, gross margins continue to collapse. Product margin down 375bps “due to higher promotional activity across both footwear and apparel”. Inventories still up 39% with sales guided to trend negative and margins collapsing. HIBB has evolved into the new off-mall Foot Locker, in that about 3/4 of sales are from Nike. That puts it in multiple purgatory as its ultimate margin is not under its own control. If Nike likes you as a retailer, you’ll always be around, but ultimately don’t control your own destiny from a P&L perspective. After the stock correction, we’re getting somewhat close to what we think is a fair value for HIBB. TAIL earnings probably settle out around $4 to $6, and 6-8x is what we think is a fair multiple for an off mall FL. Still, the directional earnings risk is far from over here.
Academy Sports (ASO) | Reports Earnings Tuesday Before The Open. ASO is on our Short Bias list, and has been since the signal of Nike inventory bloating with needs to clear the product in US sporting goods retail. Now we remain short as we have concerns around the sporting goods and outdoor category seeing downward reversion in consumption after hanging better than most discretionary categories over the last 12 months. This is a lower conviction short in sporting goods, and given the big correction over the last month and a half into this event, we probably wouldn’t be pressing. Visits trends have been ugly (below) suggesting an exit rate down something like mid to high teens, comps look likely to disappoint or be revised lower. Though with the stock trading back down to ~6.5x EPS, a clearly negative estimate revision is likely expected. Long term we like ASO the most attractive name in sporting goods with company specific earnings drivers of unit growth and good net migration trends to its core markets. The company has long term plans around margin expansion that have been in place outside of the pandemic boom, so we believe in margin levers here more than at DKS… but that doesn’t mean margins aren’t going much lower in this slowing environment. We think a fair price for ASO today is likely around the mid to high 40s, HSD multiple on slightly worse than base case $6.50 in earnings power near term.
Ollie’s Bargain Oulets (OLLI) | No Call Here But Interesting Earnings Event This Week. We were short this, and rightly so, in 2020 to 2021. Made a little money being on the Long side in 2022 until a couple months ago. We think the next move will ultimately be going short again, though we are waiting for the right timing from a P&L rate of change perspective. OLLI has some easy near term compares and some of the best absolute visits trends in retail right now (below). The stock sold off hard on recent prints like BURL’s weakish print. We have some concern around the market being too negative into this event. If we see any kind of squeeze on a decent print, we could use that as a catalyst to get short. We are not believers in the long term store targets here, and think there is real risk of declining profitability and execution risk as the company tries to scale into that store base after having faced a lot of leadership turnover.
Lovesac (LOVE) | Reports Earnings This Wednesday Before the Open. LOVE has performed well (-20%) since we added it to the Best Ideas Short list in April. The crux of our call is that in this retail home boom of the last 3 years, LOVE has only managed to generate $2mm in cumulative free cash flow. Meanwhile WSM generated nearly $3bn, RH $1.1bn, and even ARHS generated $260mm. In that context, something about LOVE’s $2mm just doesn’t add up, especially when it happened with revenue going up 180%. Now we expect end demand for home furnishings to get worse, sales are likely slowing for the next 3 or 4 quarters for LOVE, so we think it misses its revenue guide, and margins come under further pressure. We’re building to TAIL earnings power of around $1.00 to $1.50… while the street is building to $4+ including EBIT margins building into the teens. We think those expectations are ridiculous, it starts with a big 2H growth hockey stick where we think the category will remain weak. We’ll give this a low DD to mid-teens multiple meaning a stock worth around $15 to $18 vs current $23, another 20% to 35% downside.
Upbound Group (UPBD, formerly RCII) | Taking Higher on Short Bias List. We took this lower on our list a few months back, but now we’re taking it up a couple notches given the move in the stock and our view of the coming consumer environment. After a decent 1Q and a reiteration into its Investor Day the stock has rallied. The bull case is that this company serves and untapped financing market with lease to own and buy now pay later type lending in its Rent-A-Center and Acima businesses. The bull catalyst is the tightening lending market meaning UPBD becomes the “lender” of last resort with its lease to own model that would mean share gains until the consumer credit cycle bottoms. We generally agree with that, except we think the earnings risk is high for two reasons. One is that there is a high risk of rising default (considered theft in lease-to-own) on products already purchased as consumer wallets tighten and the job market gets much worse. Second is that we think there is under appreciated risk on consumption levels over the next couple of years for the durable goods type products that UPBD enables consumers to buy. We have to see the unit consumption reversion fully play out, so even if there is share opportunity, it’s on a smaller than expected industry unit base near term. So we think there is ~20% or more risk to earnings expectations over the next 18 months. When you tack on the fact that this company has $1.3bn in high cost variable debt, we think the equity is overvalued. Fair price range is our view is $15 to $25 vs current $33.
Macy’s (M) | Removing from Best Ideas Short list, going to the short bench/bias. Macy’s put up a pseudo respectable quarter, and guided down the year in a ‘Macro Aware’ way. One of the very few retailers to do so. The high end assumes that the consumer remains in its current state – bad. And the low end assumes that we see sequentially worsening from here in the Macro picture. The stock traded down materially on the day, and is down ~35% since we added it to our Best Idea Short list. We actually like how Macy’s is running the business. It might be a dying concept. But management knows it and is running extremely lean on inventory accordingly. The name is trading at 5x EPS and EBITDA, and there’s no reason we can’t see it go to 3x this summer on both metrics. But the likelihood of it coming from a downward earnings revision was materially diminished this quarter. We’d consider going long M if it becomes a single digit stock (at $15 today).
Nordstrom (JWN) | Moving higher on Best Ideas Short List. This print was similar to Macy’s as it relates to comp trajectory, gross margin performance and inventory – but the guide was dramatically different. JWN holding to the ‘recent strength at Rack’ (which was still down 11%) narrative and seems to be straight lining that throughout the year into $2.00 in EPS. We don’t think there’s a change it hits that number. This short has worked for us as well…down 34% over the past year and from the meme rally in February. Now sitting at $17.50. Optically it looks cheap – trading at 9x earnings, and 6x EBITDA. We’d actually argue that’s not cheap for JWN. Remember that nearly 100% of EBIT comes from credit income – which is worth a Synchrony or Capital One multiple closer to 6x a lower earnings number. When all is said and done, we wouldn’t be surprised to see JWN earn closer to a buck this year, which puts it squarely in the single digits – about $6-$8 vs $17.50 today. This is one of the worst management teams in retail – almost as bad as GOOS. Believe what they do, not what they say.
Williams-Sonoma (WSM) | Taking this one above HD on our Best Ideas Short list. This company has one of the most Macro unaware guides out there. The opposite of RH. We’re starting to see more promotions on WSM product across banners, which is what this company does when its business comes under pressure. Yet it’s guiding to a +/- 3% comp for the year, which we think will be impossible to hit without severely deleveraging Gross Profit margins. The consensus has come down by $0.50 to $13.50, vs $16 last year – but $4-$5 pre pandemic. We think this company will be lucky to earn $10 this year. And there’s no reason why it can’t trade at 8x that number – good for an $80 stock vs its current $119. We don’t know if this will be one massive guide down, or death by a thousand paper cuts. But either way, the story doesn’t end well. Remember that the only adult in the room was Julie Whalen – a terrific CFO – but she left for Expedia earlier this year, which was a big upgrade for EXPE, but now WSM is stuck with a JV squad in the C-Suite. We don’t believe a word they say. No Macro process.
