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
Nike (NKE) | Best Idea Long. We’re On The Other Side of the Max bearishness headed into Thursday’s Print. Nike underperformed the broader market by 20% and the XRT by closer to 30% since the beginning of May when footwear retailers started to blow up left and right. The company guided to about $0.60 for the quarter. The consensus is at $0.66. We think the Buy Side is around $0.75. We’re coming in at $0.90. Macro is a headwind, but unlike recent narratives suggest, we think inventories are getting better, not worse. We think that Nike is almost completely through its excess apparel inventory (it shares in markdown in apparel with retailers, but not really in footwear). As such, we think Gross Margins will surprise on the upside. People are bearish about Nike’s ‘return to wholesale’ by taking back customers it fired like Macy’s and DSW (DBI). People view it as a sign of weakness and as a defensive move. We think that was all part of the plan. Fire the customers, watch them comp down for 2-years, and then benefit from them crawling back on their hands and knees promising brand elevation, better fixturing, dedicated shops, and dedicated in-store employees to the Nike brand. This was all part of a well-orchestrated chess game. And Nike won. The downside to this print comes about 20 min into the conference call, when the CFO gives the outlook for the upcoming (May) FY. Our sense is that Nike guides to low single digit revenue growth, offset by roughly 200bp in GM expansion. When all is said and done, we think the top line will come in closer to 10% for the year (courtesy of China rebound and share gain from Adidas, which is in the deepest trouble its been in since it bought Reebok in 2004), and Gross Margins could be up as much as 500 basis points (300bp from anniversarying apparel clearance, 100bp from freight, and 100bps from incremental DTC at higher price points). The guidance could send the stock lower, but we think it will be a sandbag worth buying. We’re coming in at about $4.73, vs the Street at $3.89. With the magnitude of Gross Margin lift we should see this year, we think that the debate over DTC margins should finally be put to bed. For our latest deck on the secular tailwinds we see to the premium footwear brands and retailers, see Athletic Footwear | Duopoly Destruction, or Paradigm Shift: Video Replay Link CLICK HERE. 2-year out earnings should come at the $6.00 mark, vs the Street at $4.61 – that’s a massive delta for this company, and puts what appears to be a 27x p/e into perspective. The Street’s numbers (and the company’s forthcoming guidance) are simply wrong. We think you get paid on repeated earnings beats and accelerating growth from here. 30x $6 in EPS gets us to a $180 stock over 18-24 months…a big move for a large cap name like Nike (stock is currently at $109).
Sally Beauty Holdings (SBH) | Upping to Best Idea Short List. 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 $11.92, 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. Expectations for the June quarter appear to be in check, but with the volatility of this earnings stream, anything goes. 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.
Pandora (PANDY) | Taking Higher (Again) On Best Idea Short List. We increasingly think that the entry-level segment of the jewelry category is coming under pressure. SIG recently 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 30% below next year which we think makes for 30% to 40% downside risk in the stock.
Fast Retailing (9983-JP, FRCOY ADR) | Moving Up to Best Idea Short List. Fast Retiling owns UNIQLO, Theory, Comptoir des Cotonniers, PLST, GU, and Princesse Tam.Tam. But all you really need to know is that UNIQLO accounts for 85% of sales and 92% of EBIT. The other brands are a rounding error. UNIQLO Japan accounts for a little over 40% of the entire business, which is a definite risk being so reliant on one geography for such a large portion of revenue. And to be fully transparent, Japan is one of the country our Macro team is positive on right now. The remainder is in the US, China and Europe, which are squarely in the wrong place to be for mid-priced apparel in the face of Quad4s. UNIQLO is known for its inexpensive, basic clothing. Its main competitors are H&M and Zara – which is a dangerous competitive set. But to its credit, UNIQLO has held its own. The problem is that all three face an existential risk in SHEIN, which is offering a similar (plus far more extensive) product offering at literally 75% off the price points you find at those retailers (basically, everywhere outside China). We’re already short H&M (HNNMY), and that call has been working nicely. But FRCOY has traded up 42% since the September low, while the stock in local currency is up near 60%. There’s a lot going on here with currency and IFRS accounting rules, but the reality is that this company has $80bn in market cap (greater than the entire US department store space), 500bp of TAIL margin risk, and trades at a mind-numbing 39x NTM earnings, and 17x EBITDA – for an apparel company that is facing its biggest existential threat in its lifetime (SHEIN, and a more desperate H&M, Zara and Gap/Old Navy). We get it – Japanese equities tend to defy gravity as it relates to valuation for several reasons – not least of which are exchange rates and close to zero cost of borrowing. But based on our backtests…the PODs (revenue, margins, cash flow) are ‘geography-agnostic’. If we’re right on the rate of change in its sales and margins in Japan, China, Europe and the US, then this company will disappoint – again. To the Street’s credit, it is already looking for 2023 (Aug) EPS to be flattish. But there’s no reason it can’t be down 30% next year, with the Street looking for 15% earnings growth. No way a 17x EBITDA multiple holds if we’re right – and even if something closer to consensus numbers play out, this stock could STILL lose 30%+ of its value – multiples don’t expand when earnings and cash flow decline – and both of those are likely to decline deeper and for far longer than most people think.
Arhaus (ARHS) | Moving Higher on Short Bias List. We took this off our best ideas short list in April with the stock around $7.50. It sold off rapidly in the couple weeks after the company guided to reality on comps for the year. Now the stock has rallied nearly 30% in a month and is back above $9. The company guided to a reasonable directional trend of sales (comps slowing from 21% in 1Q to down 16% in 4Q) especially with the backlog dynamics, however we think the aggregate industry demand implied in that number is still overly bullish. The company margins seen over the last couple years are not sustainable, and much of the revenue of 2022 was actually due to satisfying a backlog of demand from late ‘20 to early ’21. We called this a “Bone” in our Bone, Bagger, Bust deck last month (Video Replay Link CLICK HERE), as we think this is a mid-single digit stock for a long time, with earnings power around $0.50. If we see it up in the double digits with no change to our industry outlook this could again be on the Best Ideas Short list in short order.
Wayfair (W) | Moving Back Up to The Best Ideas Short List. W’s EV is back to almost $9.5bn. In the August squeeze last year it peaked around $9.7bn, in the January squeeze this year it peaked around $10.6bn. The company of course did its $690mm convert deal (at 3.5%, adding $24mm in interest expense) in May to push out liquidity risk, but the dilution here is getting excessive. Remember the company is tracking to nearly $600mm in SBC with around a $6.5bn market cap. We remain bearish on home spend in 2023. Growth compares get harder in 3Q and 4Q. That’s again when we have incremental spending headwinds for Wayfair customers like a return of student loan payments and a higher FICA income tax limit. We think Amazon will be aggressive in Prime Day next month as it sees the high magnitude of value needed to drive conversion in this consumer environment. Lastly there is the looming risk of a UPS strike in August, which, should it happen, would not doubt disrupt Wayfair’s shipping costs and speed of delivery. It’s time for the company to show it can be profitable and still have growth, otherwise this equity could get cut in half again. We suspect we’ll see positive adjusted EBITDA (with a lot of adjustments) in 2Q, as the company promised, but we think this company is far from anything resembling real profitability or cash generation, and will struggle to grow topline for the next 12-18 months. Customer acquisition at this scale is too costly and Wayfair is highly unlikely to deliver consistent GAAP profitability unless it shrinks to a more profitable core customer base and admits to an overly ambitious TAM (which would significantly compress the enterprise value). We took this off of our Best Ideas List in February when the stock sold off to ~$37. After a 57% move up in the last month, Wayfair is going back on our Best Ideas Short list. We see downside to $20 to $30.
Gildan Activewear (GIL) | Moving Higher on Long Bias. We’ve been long and short GIL in the past. We just pivoted on GIL a month ago from short to long, as we think we’re nearing a positive inflection point in the PODs. Our short call worked out, but more important than the stock price 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 big 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. Perhaps we have one more squirrely quarter ahead, which is why it is not a Best Idea yet. But it’s likely in the next few months.
VF Corp (VFC). Adding to Long Bias list. We covered our VFC short three weeks ago after a rapid drop to $19 from when we added it at $29. We still think the brand lacks serious brand heat across its key brands like Vans, Timberland and Supreme. But we also think that earnings expectations are washed out here, and there’s not many names we can find in consumer discretionary that look like that – especially ones trading on trough multiples of 8x EPS and 9x EBITDA (note, we don’t like that the EBITDA multiple is higher than the p/e multiple). But this company just announced a new CEO who had a 10-year run where the stock was up 8x during his tenure. Definitely an upgrade for VFC. With earnings expectations at the end of a bottoming process, and what will likely be a reorganization and changing of the guard at its brands, we think the upside here is more likely than downside, despite how bearish we are in the consumer throughout the balance of the summer, and likely into 4Q. This name is by no means a Best Idea – at least not yet. But in 12 months time, our bet is that the stock is meaningfully higher than $18.
Foot Locker (FL) | Adding To Long Bias list. In what might be a sign of the apocalypse, we’re adding FL to our Long Bias list after not having been long this stock for a decade. Simply put, there’s only a small handful of companies out there that took a massive whack out of earnings in the latest quarter (most companies nickel and dimed guidance). Foot locker numbers came down by about 40%, which was a huge Black Eye to new CEO Mary Dillon (of ULTA fame) after setting lofty ’26 targets just months earlier. (note, the other companies that took a realistic cut to numbers for the year are RH, TCS, M, and perhaps AMZN – which guided conservatively for the upcoming quarter.) To be clear, we want to see an accelerating rate of change in the underlying earnings algorithm before upping this name on our Position Monitor. But we like how the company is closing mall-based stores, moving to strip centers and urban locations, and boosting the loyalty experience (something that was in Dillon’s sweet spot at ULTA). If you’re thinking that this does not read as an emphatically bullish long pitch – you’re right. So many other names we’d rather own, and about 75 that we’d like to be short. But over the next two quarters, companies beating numbers will be a rarity, and we think that FL will be one of them.
