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. This week we'll be debuting our Retail Weekly Top 3 Things that we will present every week during the Retail Show. Live Video Link CLICK HERE.
Retail Top 3 Things This Week:
- Early 2Q Earnings Reads = Bearish. With 4 earnings data points for retail in July so far we got 1 reiteration (with GAAP EPS reduced, HELE), and 3 big guide downs (LEVI, ATZ, LESL). Those guide downs were NOT buy signals. The whole retail space is set up for 2H hockey sticks (big accelerations) in sales and earnings and earnings growth. This at the same time we think the consumer is about to slow, not accelerate. We think we are likely to see a lot more of the same in retail 2Q23 earnings season over the next couple of months. We walked through the setup, why we are bearish retail, and the mismatched earnings expectations in our 3Q23 Retail Themes Call this past week Replay Video Link CLICK HERE .
- UPS Strike Risk Not At All Priced In. We are two weeks away from the expiration of the contract. With retail rallying this week, and particularly some ‘at risk’ retail names, we don’t think the market is pricing in any chance of that strike happening, which is a near term risk from where we sit. An article from influencermarketinghub.com highlights retailers with highest UPS exposure. On that list are ETSY, BBY, LOW, AEO, EBAY, ULTA, PVH(Tommy). The ones in Red we are short independent of any UPS risk.
- Steepening Visits Compares Start Now. Redbook retail sales went negative last week and faces tougher compares in the weeks ahead. We are hitting the tough compares from visits growth immediately, and they get harder for the next 2 and a half months. 3QTD trends are likely going to be below the 2Q exit rate as companies are guiding to 2H. It will be hard for CFOs to stick with hockey stick acceleration guides if the business is slowing into the moment of guidance.
Pool Corporation (POOL) | We’re comfortable with POOL as a Best Idea Short heading into this Thursday’s print. It’s obvious that the pool ecosystem is under pressure, as evidenced by Leslie’s (LESL – Short) colossal guide down last week. POOL traded down 5% on that event (when LESL lost a third of its market cap), which we don’t think is nearly enough. Keep in mind that even with last week’s weakness, this stock is up 16% from the June lows of $317. On the print in April, POOL took down guidance for the year to $14.50 at the low end vs prior guidance of $16-$17 (the Street is at $15.12). The company largely chalked the miss up to weather (it was mentioned 61 times on the call). Back then, we said to press the idea, and we’ll say the same thing now. We don’t deny that weather played a factor in the 1Q numbers – especially in California. But there’s more than Mother Nature at play here. We think that the real earnings power here is closer to $12, and the stock is currently trading at 30x that number. We get the Street’s love affair with this name, but can’t justify a 30x multiple – even on trough numbers. In 1Q, the company put up a 42% earnings decline, and for 2Q the Street is looking for just a 17% decline. We think EPS will erode closer to 30%. Then the Street is looking for 8% earnings GROWTH by 4Q. We don’t think there’s a pent-up demand issue here by any stretch. We think that new installations and renovations will be down by ~20%-30% for the year. Keep in mind that this company earned $5-$6 per share pre-pandemic. That puts our $12 eps number in a different light. Sales per store were ~$3mm pre-pandemic, and are now sitting closer to $6mm. There’s a lot of mean reversion here – especially in the 50% of the business that’s classified as ‘other’ which includes everything from gas grills, Adirondack chairs, pool toys and lighting fixtures. About 40% comes from supplies sold directly to contractors for installing and fixing pools, while the remaining 10% comes from chemicals. Unlike a traditional retailer, this name won’t get a trough multiple on trough earnings. But something closer to 20x (it’s at 22x Street numbers) on REAL earnings gets us to a stock about 30% below where it’s trading today.
RH (RH) | Rapid Repo Keeps Taking This #1 Best Idea Long Higher, And It’s a Bullish Read On 2Q Print. RH has been buying back a lot of stock this Q. Over roughly the last month and a half the company purchased 3.7mm shares for ~$1.2bn. That’s almost 17% of the total shares outstanding repurchased, making up around 14% of the trading volume of the last month. Not only is the buyback moving the stock (up 50% in the last 6 weeks), but it is a bullish read on the fundamental TREND. We don’t think we are at a consumer bottom, but RH likely thinks it has seen an earnings bottom. The company has been running sales to clear out old product line inventory, freeing up cash that would likely go towards buyback. Still, you don’t buyback $1.2bn in stock in a compressed time period if you are about to miss, or materially guide down again. So either North America in 2Q is looking comfortably ahead of expectations, and/or the RH England store (and the simultaneous launch of the international growth story) is tracking well and is likely to change the narrative around the forward growth trajectory. When RH can prove international ‘works’ there will be a massive rerating of this stock, and it likely becomes an M&A target of the big luxury companies (should Gary Friedman want to consider an acquisition). RH is a Best Idea Long and our favorite name in Retail long term, as we think TAIL earnings will be more than double the consensus, which we think will be good for a stock well over $1,000.
Etsy (ETSY) | Taking Higher On Best Ideas Short List. We took this lower just a week and a half ago, but the stock rose 12% since with some of the high frequency data this week suggesting Etsy had a few good days of sales. A few days of good sales are not enough to shake our short view. We also think that Amazon Prime Day catalyzed some share wins for AMZN, while pulling forward part of the back to school season. Additionally Etsy is squarely in the high risk bucket as it relates to the looming UPS driver strike. It will mean higher cost and/or risks of unfulfilled customer orders. Sellers for Etsy have already been through a lot with a fee increase April of 2022 while facing negative GMS trends and the Silicon Valley Bank shutdown limiting access to their business receipts during the banking crisis. A UPS strike would be another reason to consider other potential online platforms to shift business to. The margin gap has closed some with Amazon, with both trading around 16x adjusted EBITDA, though ETSY still carries a higher EV/gross profit while Amazon has a better forward GP growth outlook within consensus estimates. 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.
Leslie’s Inc (LESL) | Removing From Short List. After the colossal guide down last week we’re booking the win on LESL. We went short LESL in January at $13.20 seeing downside to $8, stock is now at $6.70. FY 2023 (September End) EPS estimates over that time period have gone from $0.80 to the guided $0.30. This could keep grinding lower, but we think earnings expectations are looking more in check after this revision. We’re booking the win on the 50% cut in the stock price and would look to POOL as the play short side now in the pool ecosystem (see above).
Victoria’s Secret (VSCO) | Removing From Short List. We’re booking the win on the VSCO short. We went short at $45.78 back in November, the call has played out faster than expected and the stock now sits at $19.30. Over that time period VSCO EPS for this year gone from $7 to $2.40. Sell side sentiment is as bearish as we have seen with 50% holds and 10% sells (though not quite as bad as the worse seen when this was part of LB). Short interest is right around peak at 13.8%. With the stock beaten up, a 0.65x EV/sales and 7x PE, and compares easing in 3Q we think the risk reward no longer support being short here. We’re not sure there is any path to reversing the share losses that have plagued this brand for several years now. Barriers to entry are falling, and the consumer sentiment is shifting away from the traditional VS brand identity. Despite efforts to try to change its image, the brand continues to lose share. It’s a self help story near term, still has big issues long term.
