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
Skechers (SKX) | Elevating to Best Idea Short List. SKX has been defying gravity, and has been putting up very respectable numbers. But keep in mind that it was the biggest beneficiary of Nike pulling out of so much wholesale distribution over the past three years. Now that party is over. Nike had a plan all along. It pulls out of ‘questionable’ retail, watches them comp down, and then the retailers crawl on their hands and knees asking how much capital they need to invest to elevate the brand in fixturing and brand presentation to become a Nike vendor again. We’ve seen this over the past two weeks with Nike returning to Macy’s and Designer Brands (DBI). While Adidas is still ceding share, it's not enough for SKX to maintain its comp momentum, and the stock has been bullet proof. Aside from the fact that SKX (poor quality management) is good for a blow up every 6-8 quarters (its’s time) the reality is the top line should lose momentum and margins are likely to take a hit. The Street is looking for $3.18 in EPS this year, and we see downside well below $3. For next year, the Street is at $3.94, and we’re coming in closer to $3.25. This stock is trading at 15x earnings and 10x EBITDA on elevated expectations, with only 3% of the float held short. There’s no reason why it can’t see a 10x PE multiple on $2.90 in earnings, which gets us to a sub-$30s stock vs its current $54. Definitely a Best Idea Short.
Pandora (PANDY) | Taking Higher on Best Ideas Short list. This past week SIG reported Q1 earnings and said how the macro pressures are affecting the business and consumer spending as well as a more promotional environment. SIG expects that both of these will continue for the course of the year. Additionally, management mentioned that it is struggling in the lower price points in fashion jewelry, more so than in the higher price points $1,000-5,000, and PANDY mainly operates in the lower price point range. The category has big risk here as Jewelry PCE in 1Q23 was still running 49% ahead of 2019 levels, there is a lot of reversion to come and it looks to be starting per SIG results. While we think sales could be up flat to down LSD for the remainder of the year, consensus is expecting far better, at mid to high single digits. Additionally, consensus has revenues growing at a MSD rate over a TAIL duration, which we just don’t believe to be achievable for Pandora. This company was comping down annually into the pandemic, and we haven’t seen anything that would convince us that it would see that type of growth going forward. This stock may seem cheap at about 6x EBITDA and 9x PE, but we think the numbers to get that valuation are too high. We’re nearly 40% below next year which we think makes for 30% to 40% downside risk.
Big Five Sporting Goods (BGFV) | Not a chance of Nike ‘unfiring’ BGFV as a customer. This stock rallied along with junk-tail, in part on hopes of Nike taking it back. The chances are VERY slim. This is a company that will lose money in perpetuity, while superior retailers – like DKS and ASO – open stores in the Pacific Northwest. No way BGFV can compete. We think this stock is a ZERO over a TAIL duration, and would stay short it to the extent you can get the borrow.
Stitch Fix (SFIX) | Elevating on Short Bias list. This stock has had a monster run – up 54% in a month. But the business model is still very broken. It has run out of TAM and should never have come public in the first place. Market cap is now over $500mm again, and institutions are starting to view it as a call option. We disagree and think that this company is permanently impaired. The biggest positive here is its cash balance, which value investors are eyeing like a hawk. But this company will continue to lose money, burn through its cash, and lever up. The is NO BUYER for this asset. It’s pulled back its spending on customer algorithms – to figure out what customers want – while firing stylists (its secret sauce). The latest quarter’s KPIs were abysmal. Average customers down 11%, with spending per customer down 9%. We don’t expect that trend to reverse anytime soon. We shorted this stock at $76, and now it’s at $4.50. One of our best short calls in recent years. But there’s no reason this can’t trade at cash value, which is 50% lower from here – then lower as the cash burns up and leverage becomes part of the equation. We’re conscious of overstaying our welcome on what has been an epic short call, but still think this stock can become a ‘bone’ before going away.
Adidas (ADS-DE/ADDYY ADR) | Moving back to Best Idea Short list. This stock has rallied by 30% since we took this name down to our Short Bias list from Best Idea several months ago. For some reason, people want to believe in this name (especially European investors). We’re not fans of the new CEO (from Puma – who chases sales at the expense of margins and brand health). We literally think this company has to be torn down to the studs and rebuilt from the ground up. If it doesn’t, it will be a multi-year share donor. If it does, margins come lower with added SG&A investment to fix the company. It’s between a rock and a hard place. TREND expectations look reasonable – at a miserable (€2.38) in EPS for the year, but then the consensus has this company swinging by a over €5 per share to EPS of €3.86 in FY24, which we think has to come down a lot – at best to the €2 level. The stock is at €160, with a consensus price target of €160 – which means we’re either going to see price targets revised higher, or see a downgrade cycle. We’d bet on the latter as this brand has ZERO heat right now. Nike is gobbling up its market share on a global basis, and this company needs to be restructured massively. That’s good for a stock well below €100.
Nordstrom (JWN) | Taking higher – again – one our Best Idea Short List. The stock rallied 13% on the ‘June Retail Squeeze’ that we highlighted last week. That’s despite having nosebleed $2.00 per share EPS guide for this year. Nordstrom Rack Improved this past quarter (still down 11%) and management is straight-lining the improvement in guidance throughout the rest of the year. Not wise for a broken concept. We still think that JWN will be lucky to earn $1.25 this year, which is good for a single digit stock on a 6-7x PE multiple. Keep in mind that ~100% of EBIT here comes from Credit. The company is basically selling product in the stores at break-even. That’s not going to change – not with the downturn we expect to see in the consumer (even JWN’s higher end consumer) starting in mid July. This stock has no business being at $20. We think you’ve got better than 50% downside.
MarineMax (HZO) | Taking higher on Best Idea Short list. The stock has rallied by 23% after the blow up as people think expectations are washed out. But we still think it has too much of the wrong inventory, and not enough of the right product. It continues to lever up by doing yet another acquisition last week (in the Great Lakes), and earnings are overstated by 2x. This stock trades at 5x earnings, which some will argue is cheap. But a) cheap is not a catalyst, earnings and PODs are. And b) this company was built to be cheap, and should trade at 5x mid-cycle earnings, while we think the consensus is high by 50%.
Acushnet (GOLF) | Still A Short, Though PGA Tour & PIF Partnership is Net Bullish. GOLF rallied this week, likely driven around the news of the Saudi Public Investment Fund (PIF) partnering with the PGATour and DP World Tour. The deal likely means that the Saudi’s will be throwing a pile of money into the game over the long term, though, given the start of the LIV tour, the focus of the investment is likely around the professional game and the marketability and monetization of the profession tour product to viewers/fans. As it relates to the call on GOLF, we don’t think the deal has any impact on the fundamentals over the next 12 to 18 months (the duration we expect to see material downward revisions to revenue and earnings. There is the potential for greater investment to drive greater participation over the long term, we’re not sure it will have much impact around US participation, but potentially helps fuel growth globally. There is actually near term risk that the PGA Tour’s deal with the controversial investment fund sour’s the marginal golfers interest in the game. There is an incremental risk that the PIF looks to invest in brands in the space, buoying GOLF’s valuation or perhaps making it an M&A target, though that was technically a risk prior to this deal as well. So our TREND outlook is same to slightly more bearish, while the 3-5 year outlook here is moderately more bullish. Staying short as we think the demand reversion and macro risk here in 2023 will take the stock lower regardless of a potential change in the long term demand profile.
Target (TGT) | Moving To Short Bias from Best Idea Short List. We went short TGT a little less than a year ago with the stock in the $160s, calling for downside to $110. After a 1 month crash, the stock is at $127. The bad PR for the company has led to a rapid selloff. The ‘boycott’ is looking like a 4 to 6% hit to traffic relative to similar big box off mall retailers over the last couple weeks. We think the comp impact is likely less, as the lost customer is not the core customer. The directional hit to the stock makes a lot of sense, and the Old Wall has been coming in with downgrades… the question now is what is the real earnings risk going forward, relative to what the stock is pricing in. Adjusting our comp numbers we think you have forward EPS risk to about $7.85, the street currently is at $8.80. On that EPS 13x would be trough, 15x very fair. That makes for a stock of around $102 to $118, or 7% to 20% downside. That’s probably not quite enough downside risk to justify the current position on the Best Ideas Short list, even for a large cap. Still a short, and still downside to both earnings and the stock, but taking it lower here.
Victoria’s Secret (VSCO) | Moving Lower on Short Bias List. I now know Victoria’s Secret… the margins were not real. Though the market is clearly waking up to that as well. After being long this around the LB separation, we’re glad we flipped to Short with the stock in the high 40s last fall. Stock has fallen over 55% in 90 days, and down 10% this week. It’s a cheap stock that can keep getting cheaper. The quarter from reported a couple weeks back had ugly results here, earnings missed by almost 50%, guiding down the full year by roughly 40%. Comps this Q down 11% slowing from down 6% in 4Q. There are some real brand problems here. Lower barriers to entry mean lots of new competition, and as competition rises and the brand is struggling to connect with the core consumer. Its perpetually losing share, and we struggle to see how the company can reverse that. We’re taking it down a few notches on the recent selloff, but could see this being close to a perma short in retail. We’re looking at forward EPS around $2.30 with the street at $2.70, and HSD multiple is probably right, meaning mid to high teens as the fair value of the stock here. So call that another 10% to 25% downside risk, while this could be a long term share bleeder.
