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.
No major changes to our Position Monitor tonight, as we just ‘re-loaded’ on Wednesday with plenty of updates. But we hosted what I think was a ‘lights out’ call with Sector Heads Howard Penney (Restaurants, Consumables), Todd Jordan (GLL) and our team this past week, which made me even more bearish on Retail compared to other consumer sectors. For a Replay of the call, CLICK HERE. GLL clearly has the most juice on the long side as travel recovers, while retail, and parts of the restaurant space have the most downside. Check out the slide below for a summary key talking points, but do yourself a favor and listen to the replay. It’s worth it.
We’ll also be hosting our 3Q Retail Themes call this Thursday the 13th at 12:30pm ET. We’re going to go through the cross-currents in the retail landscape, and will hone in on the companies that are promising the biggest hockey sticks in earnings ramp into 2H – flagging the best short opportunities. LEVI gave us a taste of what’s to come in its earnings report last week – where after multiple opportunities earlier this year to take down earnings it stuck to its guns – then just lowered 2H expectations by 20%. We think that 2024 expectations have to come back down to earth by 20-30% as well. Remember that there’s still a massive shift going on between goods and services, and goods/retail comes as the big loser. The XRT might look cheap, but earnings are all wrong. To join our presentation on Thursday CLICK HERE.
We’re likely to change some of our Position Monitor positions on Thursday, but for now, here’s the skinny on the names we’d be pressing on the short side.
Helen of Troy (HELE) | The company will have reported 1Q earnings by the time the market opens tomorrow. Our call to action is to short on the event. The Street is looking at -30% earnings on top of -30% 1Q last year. Could the company come in closer to -20%? Yes, it's possible, which is why the stock squeezed in recent weeks. But this name is in deep trouble…losing shelf space in core brands at mass retailers, can’t lever up to buy more revenue, and the spread between GAAP and (fake, non cash) earnings is likely to narrow materially over the next 12-18 months. CFO gone. CEO leaving. They know the gig is up. We’ve actually gotten some very thoughtful constructive pushback on this name recently from a bull who said that even looking at TAIL duration we’re modeling close to $7 per share in free cash flow. Unless this trades at over a 20% FCF yield, there’s no way it hits our $30 piece target. That said, HBI (which this is the modern reincarnation of) has traded at a 22% FCF yield. So never say never. Regardless, even if you believe in the Street Non-GAAP earnings next year, this should be a $70-$80 stock. We don’t believe those numbers, and think the stock is heading much lower. Knowing what we know today, we’d be shorting more on the print tomorrow regardless of whether its up or down. No way this share loser should be trading at $112.
Canada Goose (GOOS) | This is ultimately a $5 stock. This year will be where the company has to fess up that wholesalers are permanently cutting orders, if not the entire line. Yes, China will help this fall/winter, though the brand is losing share in China. But it won’t be enough of a bump to offset the North American wholesale share loss. The company announced that it’s launching $500-$600 sneakers (which look like cold weather hiking boots) in the middle of July. Questionable timing. This is one of the worst managed companies we’ve ever seen in retail. Its product extensions have been failing, and the launch into footwear, sunglasses, and luggage will be P&L dilutive. We still have earnings about $0.50 over a TREND and TAIL duration, as the company chases sales at higher margins and works through/discounts the most bloated inventory position in retail. We’ll ride this to a $5 stock.
Lowe’s (LOW) | The biggest pushback we got on LOW is that it's cheap and the bad news is already out there. We couldn’t disagree more. If you believe the consensus numbers, which you shouldn’t, the stock looks pseudo cheap. But the cycle for home improvement is just starting to turn down, and might very well be that way for 2-years. Yes, traffic has been down, but by our math the main categories sold at Lowe’s are facing the greatest rate of excess inflation (about 11%) relative to 2019. When prices start to crack, you get down traffic AND ticket, which is when the company’s bear case of 4% comps (which it already failed) turns into down 8 to 10%. On top of the obvious SG&A de-leverage, the company also has about 300-400bp of Gross Margin headwind that it gained through the pandemic, much of which could be lost. The consensus is expecting comps at HD and LOW to be positive in 2024, and we think they’ll be squarely negative. This stock has defied gravity, but we think it will come under pressure in a material way in 2H23 and 2024. Being bearish on this name is extremely likely to outlive our current bearishness on retail. LOW has no business being at $222, we wouldn’t touch it long side until its closer to $120-$140. And even then we still might avoid it. Don’t underestimate how long Home Improvement downcycles last – the Street is to a massive extent.
Williams-Sonoma (WSM) | Unlike RH, which has been taking down numbers for over a year, WSM is hanging onto nosebleed comp guidance of +3/-3. We don’t think there’s a chance in hell of WSM hitting its comp guidance without materially stepping on the accelerator on promotions, which will drive down gross margin dollars, and likely deleverage SG&A. This company earned $16 last year, and the Street thinks it’s appropriately positioned with $13.60 this year, which we simply don’t think is doable. We think this company will be lucky to earn $10 this year, and closer to $8 next year. Mind you it earned $4-$5 pre-pandemic, and unlike RH, it has no idiosyncratic drivers to growth like expanding its US gallery base, refreshing the product line after 8-years, or a European roll out. The stock is currently at $120, and we see downside to $80.
Nordstrom (JWN) | Nordstrom is one of the biggest offenders of the ‘hockey stick’ in earnings expectations in 2H. The stock rallied 13% on the ‘June Retail Squeeze’ that we highlighted last month. 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 near $20. We think you’ve got 40%-50% downside.
Wayfair (W) | Wayfair was just recently added back to the Best Ideas Short list. 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 this 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 $62.
