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.
RH (RH) | Here's What the Bears are Telling Us...And We Think They Couldn't Be Further Off the Mark. We'd be buying RH on Friday's shellacking, and quite frankly, we are surprised that we didn't see REAL buying on Friday after the company's print. The main hangup is the 3Q guide -- keeping in mind that the company kept the annual guide in-tact (for the first time in six quarters it didn't lower the year), but just took out of 3Q what it beat 2Q by. The pushback is that if RH is really going to put up an 8-10% EBIT margin in 3Q, then it's not a luxury company, hence not deserving of the multiple. Our answer there is that the company is likely to come in closer to 15%. The next point of pushback is "why did the company buy back 17% of the stock when we're headed into a recession? Now do we have a leverage problem?" Our answer there is that this company has been going through its own recession for 2-years now. It was the first one down, and will be the first to recover. The company knows what we know, and that the street is ignoring. Numbers next year are going to push $25 per share, with the Street at $15. That means that the Street will likely be upgrading this stock when it's at $500, making the repo at $325 look like a great buy. We still underwrite $50 in EPS power by year 4, and $60 in year 5. We think that's good for a $1500+ stock. RH is one of the few companies that buys back stock when it SHOULD, not when it's sitting on peak (unsustainable) margins and is at a point where it buys back the stock just because it COULD. The last pushback is when we bring up Friedman's dramatic change in tone about '24. Bears say that he's always bullish about RH even if he's bearish about Macro. But this time was different. Between the six new European galleries by year-end '24 (three of which will be by YE23), the broad based launch of Contemporary, the core product refresh (the first in 8-years), and the Modern re-launch in January, the idiosyncratic drivers at this company in '24 leave the model with more torque than any other model we can find in Consumer. Needless to say, we're buyers on this weakness. See our note and Elevator Pitch HERE.
Overstock / New Bed Bath and Beyond (OSTK) | Removing OSTK from Long Bias List. We think the full rebrand of the Overstock business and company to Bed Bath and Beyond here is a mistake. Buying the IP, domain, and customer list made a ton of sense to us. But one of the things we liked about OSTK the whole time it was on our Long Bias list is the fact that the brand has operated in ecommerce since the 1990s and has demonstrated the ability to make money, and even grow, while the category has been dominated by other players. That gave downside protection to the stock in our view. But we have no confidence in the Bed Bath and Beyond brand to do so, and the full rebrand of the Overstock business could break down the business model. With the update this week on the US site rebrand and relaunch, the company is winning new customers, but the incremental revenue and incremental margin is coming in below what we would have expected. Margins have gone well into negative territory eliminating any valuation support as well. We think you will see an accelerating top line TREND, but we have low confidence in the TAIL opportunity on the ecommerce side. The company still has an option on the tZero ownership stake, but we’re not sure you can value that much beyond 10% of the market cap today. Maybe we come back to this name at some point, but for now we can’t back declining profits into a consumer slowdown with a much more dicey TAIL setup under a dead brand name.
Carvana (CVNA) | Adding To Short Bias List. We get the consumer value proposition that CVNA is bringing to the used car industry that historically has a poor consumer experience. There is no doubt an opportunity to continue to disrupt the space. However we think the used auto market is in a precarious position, and that the industry risk will be uniquely bearish for CVNA over the next couple of years. Given the pandemic supply chain issues, new car supply remains tight, driving used car prices up to the point where used cars that are several years old are listed within ~10% of MSRP of new vehicles of the same model. A lack of leasing activity in recent years can mean continued low supply, but the used business is a supply driven model and Carvana has been paying excessively high prices to acquire vehicles. As the consumer weakens, affordability (rates) remains a problem, and new supply improves, we think we will see prices fall and Carvana will be stuck with lots of inventory seeing declining value. When prices drop, those with the capital access to replenish supply at new prices will win business, but Carvana has a massively stretched balance sheet with over $6.5bn in debt after the debt exchange and roughly $500mm in interest expense. CVNA is benefitting near term by playing catchup on a backlog of loans to be sold to Ally bank which is boosting near term profits, and could be a tailwind for another quarter or two. But looking out we think the company will struggle to put up positive EBITDA when used car prices reset lower. Street expectations are high over a TAIL duration, and the stock is trading at over 20x ambitious 2025 adjusted EBITDA numbers. With new debt terms (which protects bond holder risk at the expense of equity holders, CVNA may not be a zero on a relevant duration, but we think the equity value is likely to fall by 50% or more over 1 to 2 years. We intend to go deeper into the research on the used car space and CVNA in the coming weeks, but we come out decidedly negative on the CVNA equity today.
Moving Amazon (AMZN) to the #2 Slot on our Best Idea Long List, Ahead of Nike, for now. Simply put, we think that AMZN is de-risked relative to Nike, which is putting out 1Q earnings in another two weeks. For AMZN, we see total revenue and gross profit in our model accelerating for 3Q and 4Q, and EBIT expanding rapidly year over year coming out at EBIT up about 140% for 2023. That’s the setup we look for to be outsized Long on AMZN as that is when the multiple should expand while numbers are heading higher. If we’re right on the model TREND, this stock could set all-time highs ($175+) within 6 to 12 months. With Nike, we still think this company is at the beginning of a 3-year burst of profit growth that's a mile ahead of the consensus. We also think that Nike is going to beat the upcoming quarter handily when it reports in two weeks. But it's near certain to take down the revenue (not necessarily Gross Profit dollar) guide. We still think this company will put up gross margins this year that are ~400bps ahead of last year -- crushing the ~150bp guidance the company is sitting on today. In addition, the sentiment is SO bad on Nike right now. We can hardly find anyone on the buy side that's willing to underwrite owning it. The sentiment feels like it should be an $85 stock -- though it's sitting around $100. To be clear, if our model is right, this stock should be over $180 over a TAIL duration, as it accelerates share gain (mostly from Adidas, and to a lesser extent ONON), and puts the 'DTC is not accretive' argument to bed -- which we think happens this year (China's PTI margins going from 39% to 30% has obfuscated the DTC accretion, and we think China margins have found a bottom). We still like Nike a lot but prefer AMZN over the next several weeks as Nike likely tempers the 2Q revenue guide (which it will beat).
Academy Sports and Outdoor (ASO) | Removing from Short Bias List. ASO put up a much better quarter than DKS, which had a massive margin decline in the latest quarter. And while we still think DKS is a better run business than ASO (one we could very well be long within 12 months), we think that the earnings power at ASO is stickier, the stock is extremely cheap and keeps bouncing off the $50 mark. This is one of the few emerging unit growth stories in retail, and on steady-state earnings -- which we think we're close to seeing, is worthy of something better than its current 7x EBITDA multiple. Not sure we'd go long ASO here, especially into increasing consumer headwinds into '24, but we think the short has largely played out.
Allbirds (BIRD) | Moving this Down To Long Bias List. This move is all about relative positioning. BIRD lacks any semblance of top line momentum, and the reason we're long the name is that it is ripe -- at a mere $55mm EV -- for an activist to step in, clean house, accelerate the R&D agenda, and blow out a wholesale model. That would make for a multi-bagger from its current $1.28. But the reality is that we can't have this name on the same Best Idea List that houses names like RH, NKE, FL, VVV, DECK, AMZN and fellow high-conviction “bone” REAL. We're going to stick with this one on our Long Bias list, but we need an activist to step in for some help on this one to be a change agent.
Movado (MOV) | Taking Lower Short Side. After the guide down, EPS estimates have fallen to around where we said they should be when we added this Short side. Now at about $2.23 vs the $4.61, the stock has gone from mid $30s to $28. We are still coming out below Street expectations, but guidance and expectations have come down quite a bit since we went short this name. From a rate of change perspective, we expect improving revenue trends, though still negative YY, for the remainder of the year. We still think that the push to higher price points isn’t the best idea as MOV does not carry the brand weight its competitors do. The higher margins that would theoretically be augmented by higher price point products just doesn’t seem sustainable at +700bps improvement from pre-pandemic. Bulls may argue that the stock is cheap at just under 9x earnings, but we think that the lone estimate out there is wrong by about 10% for the current year and we’re about 50% below consensus next year. The Street is getting to $3.75 next year, meanwhile we are barely breaking $3.00 by FY28. While the PE multiple may be in the right ballpark, the earnings numbers are just too high. We think that sub-$3 is more likely over a TAIL duration – good for a $20 stock vs $28 today. While parts of our thesis still hold, some other factors have changed causing us to lower our conviction on this name.
