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 .
Retail Top 3 Things This week:
1.US Luxury Slowdown. Ugly numbers for US/Americas from the luxury brands this past week, LVMH at -1%, Prada -1%, Gucci -23%. When luxury brands aren’t growing there is clearly a problem brewing with the US consumer. High income consumer spending still has a lot more risk with the upcoming spending headwinds on higher FICA tax income limits and student loan payments returning, while coming off unprecedented levels of goods consumption.
2.SIGMAs. We published our Retail SIMGA Book with reads on 185 tickers. On one hand we’re clearly seeing inventories continue to correct, which has been the case for the last few quarters. That’s the obvious trend that jumps out from the chart below, and initially comes across as bullish. But the sales to inventory spread is still negative, and we’re now five quarters into the year/year change in margins in negative territory. CLICK HERE FOR NOTE
3. Big Earnings Week. Huge earnings week for ecommerce and other calendar quarter retail companies. Previews Below.
Amazon (AMZN) | Reports Thursday After The Close, Moving Higher On Long Bias Into The Event. We’re cautiously bullish into this AMZN print. We’re hearing that the credit card data is trending well for AMZN both in 2Q and for July so far. That’s both good and bad, good for numbers vs consensus, but means expectations on the buy side are likely for a beat and bullish looking guide. For the quarter itself, we expect a revenue beat, coming in towards the top end of the guide, which would be steadyish rate of change for 2Q. On EBIT we’re slightly below the street, at $4.1bn vs $4.8bn, though ahead on gross profit, with more SG&A than consensus. We think the 3Q guide will straddle Street revenue, with still steady-ish to slowing rate of change implied, but could be a midpoint well below the street EBIT as we’re closer to $4bn with the street at $5.5bn. We like the setup here over 2 to 4 quarters, the TREND outlook is definitely much more bullish than a few quarters ago, but there is perhaps near term slowing risk from now into early fall. TAIL setup for AMZN has been bullish all along in our view. We’re likely to be outsized bullish AMZN when can see a clear acceleration in revenue and gross profit over a multiple quarter time span, we think that starts in 4Q. We’re taking this higher on our Long Bias list, once we de-risk the 3Q guide and potential near term slowdown risk on slowing consumer spending (student loan payments, higher FICA tax income limits) we’ll likely see this back as a Best Idea Long.
Columbia Sportswear (COLM) | Short it into the Print. Results out this week. We’ve had this name on our Short Bias list for several months – while it’s not a super high conviction long-term structural short like HELE or GOOS, we think the company is going to guide down the upcoming quarter materially. This past winter was a bust for cold weather brands, and how the cycle works, the wholesalers cut orders in the season a year later as a hangover from being left with too much inventory. The company itself is in Retail Quad 4, which is a bad place to be, with margins negative 5-quarters in a row. We’re likely to see this company have to hang on for another 12 months before it sees a rebound in its business. The name isn’t egregiously expensive at 15x earnings, but there’s no reason why it can’t see 12-13x on lower numbers. Importantly, only 4% of the float is short. DO NOT be long this name into Thursday’s print. We’re squarely short.
Big Five Sporting Goods (BGFV) | We think this company is ultimately going out of business, and this quarter should be another guidepost along the way. Fundamentally, it is the worst house on a bad street, and has better quality retailers like DKS and ASO pushing into its territory. Nike fired it as a customer last year, so it’s relying on filling that space with inventory that turns more slowly and at lower margin. The name trades at a stunning 20x p/e and short interest has come down from 45% down to 14%. The consensus has EPS marching up to $0.60 per share next year, while we think it will lose money and begin to close stores. This name has Ch11 written all over it. With a market cap of $212mm its an admittedly impossible borrow. But if you can get some, we’d have some on. This is the next BBBY.
Canada Goose (GOOS) | Seasonally irrelevant quarter to be reported this week, but color on wholesale backlog for the fall should be bearish. We’ve said it before and will say it again. This is the worst management team in retail, the brand is well past it’s prime, its sitting on more inventory than any retailer or brand out there, and has to try to find a way to clear it without destroying its DTC model. We think that the wholesale model will take a significant hit in CY2H as retailers curtail orders and flat out reject selling non-parka product – which is now up to about 25% of the total. As that grows, as the company plans, we think its gross margins will come down. Again, this quarter is a rounding error, so we won’t declare victory or defeat on the print itself. We recently moved this name down our Best Idea short list simply because there are better names with near-term catalysts. But make no mistake, we think that longer term this is a mid-single digit stock. We’re sticking with the long term call.
Mister Car Wash (MCW) | We like MCW into this week’s print. We think it’s nearing the beginning of a multi-year comp acceleration as it rolls out its Titanium360 product – it’s embedded the costs and capex in guidance, but has given the Street no revenue color – so no one’s modeling it (except us). Keep in mind that when the company gave guidance in April it was coming off a VERY choppy weather-impacted quarter, particularly in the West Coast, and visits show that. Since then, the business has stabilized, and we expect to see significantly higher comp trends over the next 12 months on a multi-year basis due to its first product enhancement (and de facto price increase) since 2014. We think that revalues the stock on a higher multiple on higher earnings. No reason this can’t be a 25 stock in 12-18 months vs $9 today.
OneWater Marine (ONEW) | Expect the same warnings signs we saw from HZO last week. Dial the clock back 13 weeks, and ONEW beat the quarter. Then last week MarineMax did the same. We think there’s a very dangerous backlog vs demand dynamic emerging in the high end luxury boat space. Specifically, the retailers are working off the elevated levels of demand from the last 12-18 months, while building inventory on their balance sheets upwards of 100%. This is like what we saw from ARHS in the home furnishing space when it was putting up outsize comps due to backlog fulfillment while demand comps (usually not reported for boat retailers) where crashing. We think that could lead to a negative 2,000 bp swing in boat sales within 6-9 months – by the start of next Spring’s peak boating season. We think ONEW and HZO are both overearning by 50%, and while it might not show in this week’s numbers, we think the compression of comps and profitability will be severe over the next year. Stick with ONEW and HZO as Best Idea shorts.
The Container Store (TCS) | Reports Tuesday After The Close. We’re bullish into the TCS print this week. We expect the company to beat the low expectations, we’re at 11 cents loss vs the street at 14 cents loss, the company likely either holds or narrows the range (pulling up the bottom) on the full year guidance as we think forward earnings expectations have likely bottomed. The revenue rate of change will most likely slow in the June Q, which the company has guided to, but we should be seeing that bottom and improve sometime this summer and the visits data has been supporting that. The liquidation of Bed, Bath and Beyond presents some near term margin risk, but longer term margin gain that we think presents a HSD comp tailwind looking over ~18 months. This is one of the few companies that we think has set expectations appropriately to be able to come out and deliver beats over the coming quarters even with incremental pressure on the consumer and home spending environment. Liquidity is in check with $107mm in liquidity available and the potential for free cash generation this year despite the big guide down. We think the consumer value proposition continues to have relevance post pandemic, and it is a category that is hard to shop easily online protecting the relevance of stores and supporting its new store growth campaign. Management is sticking with its long term store opening and margin targets of 76+ new stores and low double digit operating margins. If the company can achieve even half of that we think this is a raging long here in the low single digits. We’re only modeling HSD operating margins and have 2025 EPS around $1.50. We think this stock is a multi-bagger over 2 to 3 years. Best Idea Long.
Driven Brands (DRVN) | Reports Wednesday Before The Open. We remain bullish on DRVN into this week’s print. We don’t have a strong view on how this quarter comes out. Expectations on revenue are not high, and demand indicators in the space look decent as seen in visits charts below for DRVN banners with visits YY accelerating since the spring reporting period. The hard part to assess is to what extent labor inflation will be a headwind on margins for the print. We’d rather the company be appropriately investing in labor to deliver the services the consumer expects, and support top line growth than worry about a few pennies in EPS near term. The stock is starting to look cheap for the auto services space at around 18.5x EPS and 13x EBITDA. Perhaps that is a read from the market that near term earnings could need to come down on the inflationary margin pressure. Or perhaps it’s the market sentiment around names with leverage, as this has a high debt load, though with no material maturities until 2028. Still, we think the TAIL growth trajectory here means expectations over the longer term are far too low as the company grows rapidly with both targeted M&A and organic store openings. We wouldn’t be loading up into this print, but would be buying any weakness around it. We expect the TAIL earnings expectations to ultimately end up much higher and the multiple should increase alongside as this auto aftermarket services space has continued to command premium multiples. We think DRVN is a TAIL double, and we like the pair of MNRO Short and DRVN Long with DRVN being the share gainer over the long term.
Wayfair (W) | Reports Thursday Before The Open. The company then has an Investor Day a week later. We suspect we’ll see positive adjusted EBITDA (with a lot of adjustments) in 2Q, as the company promised, with revenue inline or slightly better as the consensus is only expecting a 6% decline in sales. After the print management will start the marketing campaign, trying to convince investors that it can growth and be profitable, despite its inability to demonstrate that historically, and with customer acquisition costs rising in recent quarters while competitors are likely to step up the marketing spending (OSTK said it will). Even if the company does an ‘adjusted EBITDA’ positive quarter or two, we think this company is far from anything resembling real profitability or free cash generation, and it will struggle to grow topline for the next 12-18 months. On that 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 took this off of our Best Ideas List in February when the stock sold off to ~$37. On the recent rally its back into the top half of our Best Idea Shorts. We see downside to $20 to $30 vs current $73.
Floor & Decor (FND) | Reports Thursday After The Close. Though we remain negative on the home improvement space around the risk to comp trends and forward expectations over the coming 3 or 4 quarters, we’ve been getting less bearish on FND given the significant cuts to earnings expectations. 2023E is down to $2.63 vs $3.40 when we went bearish last fall. Meanwhile the stock has only gone up with the P/E expanding to 38x. We don’t think that multiple makes sense here, but given we actually like the TAIL model and business opportunity here with a real unit growth story, we’re not going to make a multiple argument here. We’re still short, as we think there is still earnings risk with the consensus not expecting the depth and duration of comp risk here. You can see below that visits really haven’t improved, trending down around HSD in recent months, while the street expects a rapid comp improvement from -5% this Q to be reported up to +3% a year out. That’s still too high of a bar on how we see the home space trending over 12 months. We see forward earnings closer to $2.60 to $2.70 vs the street at $2.93 and a fair value for the stock of $55 to $75 vs current $114.
Acushnet (GOLF) | Reports Thursday Before The Open. We’re expecting a beat from GOLF this week (we’re a couple pennies ahead), though with the beat likely to come from golf ball demand with clubs a bit lower than consensus. Rounds trends are up mid-single digits YTD (through June) with good May/June weather trends helping play and ball demand. Industry reports suggest ball shipments are running up around MSD, with clubs down MSD. Also below you can see visitation at two top golf retailers (Golf Galaxy and PGA superstore) saw strong growth in the spring but both have seen visits significantly slowing over the last month or so. We expect 2H trends for the industry and GOLF to look materially worse that the 1H result as consumer spending continues to see pressure, however, we are not sure whether GOLF management will guide to that risk on the earnings release. As we look at GOLF we see a company that is overearning, selling long lived products that saw over consumption over the last 3 years, with weakening macro, yet having high forward expectations and a premium multiple. The NGF reported that golf participation over the last 3 years (through 2022) is up just 5% total, and a good slice of the growth was youth players (that don’t drop thousands of dollars on new Titleist clubs). Meanwhile, rounds are up high teens vs 2019, and GOLF equipment is expected to be up about 45% in 2023. That means the growth in spending has been from core golfers playing more, and replacing their equipment, at elevated prices. We think rounds will trend lower over time as time allocation gradually trends more towards pre-pandemic trends, though perhaps settling at higher than 2019 levels. Meanwhile, GOLF’s inventories are up a lot, +85% vs 2019. We think inventory is starting to build in at retail, both in new and quality used equipment. We’re coming in with forward EBITDA of around $320mm vs the street at $366mm, at 8-10x EBITDA it means a stock in the high 20s to mid-30s vs current $57.
Etsy (ETSY) | Reports Wednesday After The Close. We’re bearish ETSY into the print this week. The company is likely to beat (EBITDA being the line of reference), it always does, but it’s the makeup of earnings and the guidance outlook that has tended to drive the stock. We’re expecting revenue inline and EBITA with elevated SBC to come in inline or ahead. Though, we think the TREND outlook on the P&L supports this stock being a Best Idea short. We’ve lapped the seller fee increase of April 2022, so growth will see incremental pressure immediately. GMS trends continue to be weak, as we hear the ‘high frequency data’ is suggesting something in the low single digits. We think those growth trends can actually get weaker into 2H as the consumer feels more spending pressure. We think Prime Day pulled forward some BTS sales and took some near term share to Amazon, a survey from Deloitte suggested a significant shift planned for consumers’ back to school shopping towards Prime Day. Plus, OSTK and W are likely to step up marketing and/or promotions to try to support growth, further pressuring growth and margin trends here at ETSY. Recall ETSY recently announced the selling of its Brazilian elo7 business. It acquired Elo7 for $217mm in June 2021… then took a $147.1mm impairment on the asset last year. Terms were not disclosed, but its was likely selling at a small fraction of what ETSY bought it for. Net negative read on ETSY TAIL as it is losing the international growth opportunity that this acquisition was supposed to support. We think a fair price here is around $60 to $75 meaning 25% to 40% downside with directional pressure on the P&L and a big multiple (17x EBITDA) on weak growth
Gildan (GIL) | Reports Thursday Before The Open. We’re bullish on GIL with this 2Q likely to be the last ‘squirrely’ print. We pivoted on GIL a couple months ago from short to long, as we are nearing a positive inflection point in the PODs which we expect starting now (3Q). 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. This isn’t a Best Idea Long yet, as we felt management might be overly bullish on macro and near term demand as of a few months ago, so we could see a slight tempering of 2023, but with the P&L likely to accelerate immediately, and the multiple near historical troughs, we think (as of late May) it’s time to nibble Long side, and be buying any weakness around this print.
Revolve (RVLV) | Watching RVLV Into The Print Wednesday. Best Idea Short RVLV is reporting this week. We like to keep an eye on the unit trends of the sale and final sale products at RVLV, and since about mid-May, sale and final sale items listed on the Revolve website had been trending down, but they saw a material uptick last week. The uptick is most likely due to the company working to clean out some excess summer inventory in advance of fall selling season. We expect inventory levels to remain elevated and above revenue growth trends YY on the print this week. Consensus has gross margins for the quarter coming in at 53.2% and for the year at 52.2%, but for the quarter we’re about 200bps below that and the year is closer to 100bps below consensus. This stock is still trading at nearly 28x earnings, and that’s on a too high earnings number. Consensus EPS for the year is coming in at $0.57, and we modeled out to about $0.46. We expect demand to continue to slow and new customer additions and customer spend to continue to decline, all driving sales growth lower. This company needs an all around reset.
Moet Hennessy – Louis Vuitton [LVMH] (MC-PAR/LVMUY ADR) | Taking LVMH Off Our Long Bias List. We initially added LVMH to our bias list back in October, trading at 609 euros, and it is now at 841 euros. It’s been a good call for us, and we’re going to call it for now. While the company had a decent quarter and 1H print this past week, US weakness was undoubtable. US went from +8% in the first quarter to down 1% in the second, with management expecting continued weakness in the region. We’re worried about the luxury goods consumption over the upcoming quarters, especially given the chart below, with luxury goods consumption trending negative YY for the past nine months. At this point, we think LVMH is a fairly valued company with upcoming catalyst and are booking the win.
Kering (KER-PAR/PPRUY ADR) | Adding Kering Back To Short Bias List. This name has been on both sides of our bias last over the last nine months. We initially added it short side as a pair trade with LVMH when it was at 439 euros. Then a couple months later we flipped it to long bias list at 467 euros and booked that win at the end of April when the stock was at 570 euros. Now the stock is trading at 531, after a less than impressive print. The company missed on two of its three main brands in 1H and both Gucci and YSL having slowing growth from Q1 to Q2. Kering has major brand problems, brand growth is slowing and the company is undergoing major management and organizational changes, with the main goal of getting Gucci back on a path to growth and to reign in the Gucci aesthetic. We expect things will continue to be tough for this company over the next few quarters and think the stock has downside from here. We added it long side back in December when it was trading at about 14x earnings, booked the win around 17.5x earnings and its now at 16.3x earnings. There is no reason it couldn’t get back down to 14x as growth continues to slow. Adding to the bottom of our Short Bias list as we watch it and do more work.
