We’re hosting our weekly “The Retail Show” tomorrow, Wednesday 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
MercadoLibre (MELI) | Adding to Long Bias List. We are adding MELI long side. The bullish setup is simple. We have a positive inflection to the Macro Quads that are supportive of strength in consumer spending and consumer equities in MELI’s core markets. We have a high probability of rate of change improvement in the business, particularly on the top line, and we have lower competitive intensity with a core competitor under severe financial pressure. Meanwhile, this is a secular growth story as MELI is the ecommerce leader in Central and South America.
There is a high probability of Macro Quad 2 (growth and inflation accelerating in Brazil (54 % of sales) for 3Q23 and 4Q23. The macro outlook for Argentina (24 % of sales) is currently Quad 1 (growth accelerating and inflation slowing) though with a moderate 50% conditional probability. Mexico (18% of sales) is also projected to be in Quad 1 in the back half. Both of these quads (1 and 2) are historically good for consumer rate of change and consumer equity performance, Quad 2 in particular. MELI, like most ecommerce companies, saw outsized growth in the pandemic, but over the last year or so has seen growth slow from +60% to about +25% in 2Q just ended. Compares progressively ease from here. Then the company has a core competitor in Brazil’s ecommerce company Americanas, which has filed for bankruptcy and has been working to settle with creditors. The bankruptcy came after accounting irregularities were uncovered about 6 months back. The setup is positive for MELI to win share in what is a strong secular growth category of online retail.
We’re continuing to dive in on the research here, but we think this is a TAIL winner, and TREND setup is bullish with Macro working in the company’s favor. A good long near term while we are bearish on US consumer discretionary over the coming few months.
Wayfair (W) | Moving Higher On Best Ideas Short List. Wayfair was just recently added back to the Best Ideas Short list, and its already moving up after the 18% rally over the last week and a half. EV is back up to $10.6bn where it peaked in the January squeeze. On the fundamental setup, 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 week as it sees the high magnitude of value needed to drive conversion in this consumer environment. 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. We took this off of our Best Ideas List in February when the stock sold off to ~$37. It went back on about a week back after a 60% move up in the last month. We see downside to $20 to $30 vs current $68.
Etsy (ETSY ) | Shifting lower on Best Ideas Short List. We took this up just a couple weeks back with the stock around $95, its already corrected $10 to around $85, down 10% with the XRT up 3%. We’re shifting it lower, as we manage the risk reward, and take up the Wayfair short with its recent move up. ETSY remains a Best Idea Short. 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. Near term risks include Amazon Prime Day being likely to bring strong discounts as Amazon looks to win share while knowing the customer needs to see strong value to convert. Home retail (a core ETSY category) remains under pressure. Additionally the risk around a UPS strike and rising costs of delivery will be a problem for ETSY and its sellers.
Topgolf Callaway Brands Corp (MODG) | Adding to Short Bias List. Co-Covering with Hedgeye Restaurant Sector Head Howard Penney. We’ve been short golf equipment since late 2022 with our bearish view on GOLF (nearly pure play on golf balls/equipment). The risk on being at peak golf consumption exists for MODG’s equipment business as well, which makes up 35% of revenue, but about 60% of trailing EBIT. The narrative the last couple years was around all the new players coming to golf since the start of Covid, yet per the NGF data, golf participation over the last 3 years is up just 5% total (not CAGR). Rounds are up around mid-teens, and MODG equipment is up about 45%. We think long lived golf equipment items like clubs, footwear, and gear are going to see a big drop consumption over the next 12 months. On the Top Golf side, we get that there is a unit growth story here, but the core ranges with RFID technology require a lot of capex and re-investment. We also think that early locations could be losing their novelty, pressuring growth even as units ramp. Ultimately this is an experiential restaurant concept, which per our Restaurant’s Sector Head Howard Penney, is generally more cyclical. Expect demand risk in 2H and beyond as the consumer wallet continues to be under pressure. Given that much of the investment case is around TopGolf, we’ll be co-covering MODG with Howard given his extensive experience covering restaurants including other experiential concepts like Dave & Buster’s (which he is massively short). MODG going on the Short Bias list as we continue to dive in on the research – likely to go higher as that plays out. Much work to do here, but near term trends are likely very bearish. We’ll touch on this name when we host our joint call on Thursday with Howard Penney (Restaurants, Consumables, Cannabis) and Todd Jordan (Gaming, Lodging, Leisure) to discuss the bifurcation we’re seeing in goods and services, and the best longs and shorts to play accordingly in our respective spaces. The call is at 12:30 ET on the 6th. For access CLICK HERE.
Nike, Inc. (NKE) | Moving up to the #2 slot on our Best Idea Long list, behind RH and ahead of CPRI (formerly #2). Let me cut right to the thesis and why I’d be buying today. Nike is a company that grows in multi-year bursts. I’ve seen (and lived – worked there) it time and time again over the course of nearly 30-years. It resets the marketplace, R&D, pricing, and product positioning with the right retail channels and then goes through a multi-year burst of share gain while it simultaneously grows the market. I firmly believe that we’re at the beginning of one of those multi-year bursts, which should start to play out in the current quarter. Inventories are down double digits in units, so the company is being ‘Macro Aware’ in product and promotion planning at wholesale. But the company gave guidance of 5% top line growth for the upcoming year on the recent quarter (I was assuming it’d give lsd guide), which I think will end up closer to 10%. Ditto on the gross margin. As I expected, Nike guided to ~100-200 upside in GM for the year. But when you add on lapping apparel discounting from last year, excess freight (which was just renegotiated to below 2019 levels), lack of FX hit, and the shift to digital (which we think will put the ‘is digital accretive’ argument to bed this year) we get to over 400bp-500bp GM improvement for the year. That gets us to $4.50 or better for the year, compared to the consensus at $3.75. Mind you, this ‘burst’ of growth is beginning at the same time we think that competitors like Adidas, Puma and UnderArmour are melting down. This is like 2004 all over again, when Adidas acquired Reebok and served up 800bp of market share on a silver platter to Nike. We think Adidas has to be torn down to the studs and rebuilt again in order to regain relevance, and think that it’s going to tank numbers next year. Again, this is not a 1-year phenomenon. We’re looking at a 2-3 year acceleration in growth and profitability. We built to $5.75-$6.00 in FY25 (May), which is 20% ahead of the consensus. We think what’s now a $110 stock sees $180 over a TAIL duration.
Capri Holdings (CPRI) | Taking down a notch on our Best Idea Long list. We still like this name a lot – for so many reasons. But we have to look at the companies promising a hockey stick in earnings for the duration of the year, and CPRI is one of the worst offenders. The company is in the process of dramatically pulling back on wholesale distribution, so while margins should get better, it will pressure the top line. The thesis is that as Versace and Jimmy Choo double in size and margins go up 3x for Versace and 2x for Choo – those brands should account for upwards of 40% of EBITDA for the portfolio as a whole. There’s no way this name trades at 5x earnings and an 18% FCF Yield if we’re right in that assertion. Would we ever argue an LVMH or Kering multiple? No way, but could it trade at 10-12x earnings? Especially if John Idol steps down this year (one of the most hated CEOs in Retail)? Not a stretch at all. Tapestry is there already, and it has an inferior portfolio (admittedly, the Coach brand has more heat than Kors right now, but that can reverse quickly). If I were a PE investor, I’d be looking at buying this entire company at a premium – say $45 – selling Choo and Versace to LVMH, Kering or Richemont for 2x what it bought them for (it built companies and infrastructure around what were loosely run brands) and are two quarters away from a top line reacceleration. Then you’re left with the Michael Kors stub/cash cow, which you either milk for cash, or sell to Tapestry so it can run the Kors and Coach brands under one umbrella and mitigate competition. Seems like a slam dunk transaction on all fronts. To be clear, that PE investor would be robbing CPRI shareholders of the multi-year upside to the portfolio. But it definitely provides downside support here.
The RealReal (REAL) | Taking materially higher on our Best Idea Long list. This stock ripped last week (up 42% last week). We’ve been on the road meeting with investors for two weeks straight and pitched this one in almost every meeting. Don’t let the price pop fool/dissuade you. The stock still sits at $2.34 vs its peak of $30. We think that within one year, this company will have a dramatically different perception around strategic direction, its balance sheet, and earnings power. As for strategic direction, the new CEO (formerly of Neiman) has a lot in his back pocket to accelerate growth. The first, which has already been executed (and we’re starting to see it now), is the effort to eliminate items under $200 on its site, which are money losers and brand destructive. The second, is to take advertising revenue from 1% up to 5% in fairly short order. The third, and potentially most interesting is that we think the CEO is going to strike deals with high end department stores to ‘cleanly’ clear out higher priced merchandise that would otherwise be discounted. It gets the company around MAP pricing, and could solidify its position as the pre-eminent aftermarket luxury goods retailer in the business. We also fully believe, largely as a result of these actions, that the company will be EBITDA positive in 2024. Not to mention that there’s a high probability of the company eliminating its debt via a private transaction (though could be dilutive to equity – we can only speculate as to the terms). This company also benefits from a trade-down effect, which is bullish on the margin in a consumer downturn. All in, we think this name will double, and double again, and THEN institutional investors will start to look at it (current $200mm in cap is too small for most). This has multi-bagger written all over it.
Helen of Troy (HELE) | Preview into earnings on Monday. HELE sits at #1 on our Best Idea Short List. This stock is up 12% over the past month and +7.5% over the past week as earnings approaches. The bull case we get is that earnings expectations have bottomed and the stock looks cheap on next year’s earnings – which is bullish for a heavily shorted stock 25% of the float is short). The company had a 20% decline in earnings last quarter, and the Street is at -30% this quarter (1Q – May23) and then down 25% in 2Q. That’s probably about right. But then in 2H the Street has earnings rebounding again into the low teens, which is far too bullish. The company almost certainly WILL NOT guide up the year – even if it comes in a few pennies on an atrocious earnings algorithm. This quarter it’s Bed Bath and Beyond, which accounts for about 3% of sales. Let’s see if the company special charges that one. We’d bet yes, so the oblivious consensus will look right through it. But this is real revenue and cash flow and it’s gone forever. This company might very well never post organic growth again in its marginal portfolio. You gotta put your ‘student of history’ hat on here. This is the HBI from 5-years ago, Newell Rubbermaid from 10 years ago, and Jones Apparel Group (now defunct) from 15 years ago. Companies lousy at running marginal brands, but good at levering up to buy revenue and then writing off eroding brands and counting them as ‘special charges’ which the Street takes hook, line and sinker. The irony here is that even if you believe the Street’s $10 EPS number next year, this name should be trading at about $70-$80, not $110. If you believe, as we do, that the spread between GAAP and fake, non cash, non-GAAP earnings will narrow dramatically over the next 1-2 years as the company runs out of special charges and loses share in its portfolio, you get to about $4 in earnings and a $30 stock. Positioning-wise we think people have been covering into the event – afraid of a beat. But we think trends are headed the wrong way, earnings growth will remain negative over a TREND and TAIL duration, and you’ll get paid on this short big-time. We wouldn’t be covering into this print – at $80 maybe, but not at $110.
