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
Sally Beauty Holdings (SBH) | New Short Idea. SBH is an over-stored net share loser in the beauty space. While the beauty category surged 40% during the pandemic, SBH sales were extremely volatile while the company was closing unproductive stores. The bull case is that margins will improve while store closures continue, but at over 4,000 company owned stores, we can’t get to respectable margins until the company closes a good third of its fleet. And that’s not in the plan. E-commerce growth has been meaningfully underperforming Ulta and Sephora, as its lower income customer has been hurt during this inflationary retail environment – despite the strength of the beauty category. We view the BSG (Business Systems Group) as being more defendable (currently ~1,200 stores) as it exclusively sells to salons and professionals. It’s a more stable business. But it too has lost share during the pandemic. What happens when we see the supply/demand equation in Beauty turn negative (as we outlined in our recent beauty deck Link CLICK HERE)? We think the share loss that has been obfuscated by category strength during the pandemic will be front and center, and will become apparent in store productivity, margins, EPS and ultimately the stock price. Bulls tell us that its too cheap to short at 6x earnings (only 6% of the float is short). But it’s also trading at 6.3x EBITDA. Always be wary of companies where the EBITDA multiple is higher than the p/e. This company is sitting on about $1bn in net debt on a market cap of $1.3bn. And we don’t think it has a shot at hitting the Street’s numbers next year (FY ends in Sept). Currently at $12.38, we think this is a single digit stock on our estimates. There’s no reason this name can’t trade at 3x EBITDA, which takes equity value below $5. Are we making that call yet? No. That’s why this name is being introduced on our Short Bias list. But this is a Best Idea candidate if the company finds a way to beat the June quarter and it trades higher from here. The multi-year economics here are dreadful and will be deteriorating. The stock has been hit by 31% since its $18 recent highs, but history is irrelevant here with the economics of the business changing against the company.
For full replay of our Beauty Deep Dive, Video Replay Link CLICK HERE.
Ulta Beauty (ULTA) | Taking Higher on Best Idea Short List. After cracking on the last quarter, ULTA has rallied by 10%. Much like our take on SBH, we think that revenue will decelerate sharply from here, gross margins will contract, while SG&A heads higher. Big mean reversion towards pre-pandemic margin levels when this concept put up a 12-13% EBIT margins vs ~16% today. The consensus already has margins reverting to about 14% next year. But with EBIT SHRINKING on a yy basis, and the only EPS growth coming from share repo, we don’t think it’s a recipe for this stock to work on the upside. Again, the supply/demand economics in this category are likely to negatively inflect over the next 12-24 months, which should re-rate ULTA accordingly. To many, the stock looks cheap at a high teens multiple, but we wouldn’t touch it long side until its trades at 7-8x REAL EBITDA, which suggests a stock in the low $300s – a far cry from the $448 it trades at today. We’re also seeing clear evidence that the Kohl’s stores opening Sephora shops (the entire 1,150 store fleet) are taking incremental visits share from ULTA given their close proximity. Ultimately, we think ULTA will protect its market share, but it will come at the expense of promotions and Gross Margin. Also keep in mind that starting later this summer, when the consumer is likely to be at its roughest point, ULTA laps a 5% price increase which flowed directly to the bottom line over the past year. All the PODs are going the wrong way for this company – and that equals multiple compression.
Interparfums (IPAR) | Taking lower on Best Idea Short List. After doing work for out Beauty deck this past week, we’re moving IPAR lower (to the bottom) of our Best Idea Short List. The stock is up about 40% since we moved it to our Best Idea list in December (ie. we’ve been wrong on this one), while sales growth decelerated in 1Q to +24% from +48% in 4Q and margin expansion moderated – Q1 EBIT up 450bps and Q4 EBIT up 1,330bps. With the stock pushing higher and rate of change slowing for sales and margins, we would probably normally press the short here, but we need to be honest and true to our initial thesis which related to the sustainability of the margin expansion seen during the pandemic. Initially we had margins reverting to pre-COVID levels of 13-14%, but after our work on our Beauty deck we think the company can probably sustain +15% (note: it’s currently pushing 18%). Unit prices in Fragrance are up 31.5% since 2019, and over the last 20 years prices have risen annually with the only two times prices declined YY in 2008 and 2020, down 0.8% and 0.6% respectively. We think that the fragrance category is one of the more defendable categories in Beauty, but it’s not immune to a supply/demand imbalance, or a pullback in high-end consumer spending. This name trades at a nosebleed 30x p/e and a 19x EBITDA multiple, with only 2% of the float held short. If there is a primary area where we went wrong on this name, it’s that it’s a good Quad 4 stock – trading more like a staple than a consumer discretionary/beauty name. We question how much pricing there is left in this category. The consensus has margins going to 20% over a TAIL duration, which we don’t think could be more wrong. Again, this short has gone against us, and it may take longer to play out that names like ULTA and SBH, but we think the model will continue to mean revert to numbers below consensus and take the multiple with it. 
Etsy (ETSY) | Taking Higher On Best Ideas Short List. Stock has seen a rally in June up 17% in June. Though our short call has been working, and the stock is down 27% over the last 3 months. The company just announced a $1bn buyback authorization, seemingly bullish, but you have to wonder that if this is such a quality long term growth story, why is the company buying back stock instead of putting the capital towards growth investments. The buyback at least helps offset SBC dilution, and pressure from the CEO selling a few million or so in stock every month, which was the case for most of the last year, after even larger sales in 2021 into 2022 when the stock was higher. On the setup for the business we have lapped the seller fee increase, so top line will slow in 2Q. In 3Q ecommerce compares get harder, and Amazon will likely be aggressive in winning share around Prime day as the consumer gets more value conscious. With the consumer wallet continuing to be under pressure, we could easily have another slowdown in 3Q. We think a fair price here is around $60 to $75 meaning 20% to 40% downside with directional pressure on the P&L and a big multiple on weak growth.
Best Buy (BBY) | Taking Higher On Best Ideas Short List. Stock has rallied up 13% in the last month since reporting earnings. This stock is far from cheap at 13x PE. We think the market underappreciates the earnings risk around the credit cycle with credit income inflecting to a headwind from a tailwind. On the last call the CFO stated “additional context on the profit sharing revenue from our credit card arrangement, which we have now called out as a benefit to our gross profit rate for the last 8 quarters. In fiscal '23, the profit share was approximately 1.4% of domestic revenue, an increase of 50 basis points compared to fiscal '20. The growth was driven by the increased usage of our card both at and outside of Best Buy and a favorable credit environment. Our outlook for fiscal '24 assumes that profit share will have a slightly negative year-over-year impact on our gross profit rate for the remainder of the year.” As we understand the credit partnership here, profit share has roughly a 100% margin flow through. So you have arguably ~1/3 of EBIT coming from credit (1.4% of sales with ~4.4% margins last year). As balances went up and credit quality went to peak credit ADDED 50bps of margin. But now credit is going from tailwind to headwind, meaning there is arguably at least 50bps of incremental margin risk from credit alone, and the potential for much more if we see a truly weak consumer credit environment with recessionary levels of delinquencies and bad debt expense. Credit trust metrics for big private label retail partners reported this week continue to show accelerating delinquency trends. Credit quality continues to get worse and bad debt risk for portfolios is rising. On the BBY retail side, even with moderately easier compares June visits are still trending down double digits. We have a couple weeks of easy compares ahead then they get progressively harder through late Aug when we think consumer spending dries up even more. We think you have earnings downside to $5 to $5.50 and stock downside to the mid to high 50s vs current $80. This is a Best Idea Short that we don’t think is done.
On Holdings (ONON) | Moving Higher On Best Idea Short List. ONON squeezed back above the $30 mark over the past three weeks since the company’s bearish earnings report. The thesis for us is the same. The company is preparing to stuff the wholesale channel. Bulls tell us that if you talk to Dick’s or Foot Locker, they’ll tell you that they’ll take as much ON product as they can get their hands on. THAT’S THE BEGINNING OF THE PROBLEM. This company is sitting on 186% inventory growth vs last year, and we think 80% of that is headed to wholesale. With a slowdown in consumer spending on discretionary goods, and most importantly, insufficient tiering of product by style and price point to different wholesalers, we think that the product will be BOGO’d by back-to-school – holiday latest. That’s when this stock comes crashing down. Inventories remain out of whack, revenue slows, margins come down due to a wholesale markdown sharing mechanism, and it deleverages SG&A. Keep in mind that this name trades at 26x EBITDA, a 20% premium to Nike, despite the fact that 80% of its sales come from one silhouette. As we outlined in our ONON BlackBook (Video Replay Link CLICK HERE ) our work suggests that the consumer isn’t even convinced that this is a real brand – but rather a product that caught a positive consumer trend at a time where Nike was pulling away from wholesale (that’s reversing course now). We think this multiple can get cut in half on the day of reckoning for ONON, and we’d be more aggressive shorting it over $30. Only 7% of the float is short today. Most of the conversations we have with institutions are that they think this brand is the next Nike – similar to what people argued about UAA 15 years ago. Look at how that ended.
Revolve (RVLV) | Taking Lower on Best Idea Short List. This name has been a champ for us. Down 75% from when we initially went short, and down 40% over the past 90 days. We still have very little faith in this model, and think it has a customer acquisition problem – much like we saw at SFIX. Not to mention that the boom we saw upon reopening for ‘going out’ attire is starting to moderate. But the name is down to a 13x EBITDA multiple from 51x at the peak in 2021. We still think it’s a $8-$10 stock at best over a TAIL duration (now at $16), but with 30% of the float short, and after a rally in some other names on our Short list, we think there are better risk/reward opportunities out there – for now.
OneWater Marine (ONEW) | Taking Higher on Best Idea Short List. This stock rallied hard over the past month (21%) after miraculously not missing the quarter. But this company is deep trouble. Aside from high-end boat demand tanking, the franchise business is slowing materially given the higher interest rate environment, and potential franchisees inability to secure capital at an acceptable return (if at all). This stock looks cheap at 5x EPS, but trades at 8x EBITDA. Even on the Street’s fake/wrong numbers for 2024 (off by a good 50%) this name deserves an EBITDA multiple closer to 3-5x. It’s got a hefty $1bn debt burden on a $550mm market cap, and if it trades at the lower end of that multiple range there’s no equity value left. It’s a matter of time before this high-end boat roll-up business model cracks – hard.
