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.
Nike, Inc (NKE) | It's Nike Reporting Week (NKE). Pin action Alert on Friday! (Thurs PM print) As noted last week when we commented on FL vs Nike, we think this will be an ugly stock event (granted, the stock is down 10% from that comment). If you own it -- which over a TAIL duration you should -- you definitely want to protect yourself on the downside with options or sell SOME into the event. We think the quarter is fine, and the company will beat on Gross Margin -- something that should accelerate meaningfully throughout the year (we still get to 400bp GM improvement vs the guide at +150). But the 2Q guide is the problem. Even in a good economic environment where Nike is gaining share it takes down the upcoming quarter. For now it's ceding share in running, with big plans for a platform launch in the Spring ahead of the Olympics (which it should start talking about). But that won't matter in FY2Q (Nov). The stock is down to $90 -- it's been acting like death. When the stock was at $100 we said that horrible sentiment and a guide down for the quarter (we don't think the year) could send this stock to $85-$90. We're almost there. To be 100% clear, we think that this will be a huge stock over a TAIL duration. The innovation pipe, especially in running and lifestyle (basketball is on fire and is untouchable) is better than people give this story credit for. The narrative is that 'innovation is dead' at Nike and that it will cost Donohoe his job. We don't think that's the case. We think that CY2024 will be a big innovation year for Nike in Footwear, at the same time Adidas has to comp the comp with the Samba and Gazelle, and HOKA slows, while ONON melts down. Never mind the fact that Adidas innovation is dead in the water, and this company doesn't have a chance in hell at making next year's numbers (while the Street has a love affair with this stock). We're sticking with our call outlined in our latest Black Book (CLICK HERE) that Nike is about to go through a multi-year burst of profitability growth -- driven by share gains (a counter-consensus call) and MUCH higher Gross Margins. We also think that despite the incremental shift back into Wholesale, the 'is DTC accretive' question will finally be put to bed. Again, the consensus thinks its a wash and was a strategic gaffe. We disagree. Did Nike overstep its bounds in cutting back on certain wholesale accounts? Yes. That's why we're so bullish on FL as the 'Nike ratio' should go from ~50% to 65%+ over 2-years -- putting the company into a massive comp cycle. As outlined in our FL deck (CLICK HERE). If our revenue and profit forecasts are right over the next 3-years, Nike should be a $180 stock -- a double from where it's trading today. It's VERY rare that you get the 'double' setup for a name like Nike. We think this is the last negative event before growth reaccelerates. If it sells off, we'd be buying in size...if it trades up, we'd be buying anyway ahead of a multi-year lift in growth profitability and earnings.
Deckers Outdoor (DECK) | Removing from Best Idea Long list, moving to the bench. This stock has doubled since we added to our Best Idea Long list, and the fundamentals have largely been on fire. We see a rebound in Ugg over the all important winter/fall quarters, and HOKA is still healthy. But Nike is putting several hundred million into its running business to recapture share from HOKA and ONON, which at a minimum will create a meaningful headwind for growth, and likely the multiple (especially if ONON blows up) in 2024. We still get to numbers ~10% above consensus, so are keeping this name on our Long Bias list. Though if Nike comes out strong out of the box in the Spring in running, HOKA and (especially ONON -- Best Idea Short) will have a real problem on their hands.
Skechers (SKX) | The first sign of the apocalypse was when we added FL to our Best Idea Long list -- as I've (McGough) hated this company for the better part of my career. But we make calls on research, not biases and feelings. And FL is about to go through a multi-year comp upcycle. SKX is the only company I've hated (though rarely been short) more than FL. I simply don't trust management, and am not a fan of the 'fast second, zero innovation' business model. But the reality is that there's been a paradigm shift where major brands have upshifted in price points and have left virtually NOBODY in the $70-$80 price point except Skechers. It arguably has less competition today than it has in its entire storied (and volatile) history. But credit where it's due...SKX management has been executing extremely well, both in the US and Internationally lately, and it's been putting up very respectable DTC numbers. The company lowballed the 3Q earnings guide, so I think it's one of the few footwear brands that will beat 3Q expectations, with the stock trading at a 12x PE and 9x EBITDA multiple. Is that trough? No. But business momentum with dwindling competition in its core price point should allow it to put up better than $0.90 ps vs the Street at $0.79 for the upcoming quarter, and we wouldn't be surprised to see this company push $4.75 in EPS next year with the Street at $4. Then people will start to look at $5-$6 in EPS. If that's the case, it will likely get a 15x multiple on those earnings. That's good for an $80-$90 stock over 1-2 years -- nearly double its current $47. Definitely a Best Idea candidate as we do more work on the name.
Tapestry (TPR) | Short has been working, but we'd press it at $28. We outlined our full thesis on the name in our Black Book (CLICK HERE), but at $34 we said that this stock could see a low $20s price as we approach the deal closing date for the CPRI merger. This thing will be over 4x levered on what will likely be EBITDA cuts in the quarters immediately following the deal to clean up the sins of CPRI management as it acts unhealthily to keep numbers high (pushing the envelope just enough to not violate the merger agreement) as the deal closing date approaches in early 2024. On top of that, the category (mid-range luxury) is likely to be highly promotional, which won't help either business on a stand alone basis. This stock looks cheap on earnings, but the EBITDA multiple and the leverage could take this stock to $10 if EBITDA gets cut enough and we're looking at a 5-6 EBITDA multiple on 4+x leverage. This market has no appetite for those dynamics. But to be clear, the cash flow characteristics of this business are simply astounding, and this company can be debt free over a 4-year time period. That will make for a VERY powerful long idea once this name finishes its bottoming process. But we think the upcoming quarter for both companies will come with a guarded outlook, especially given hot inflation, student loans coming back, a historically low personal savings rate, outsized consumer leverage, and tightening consumer credit standards. We think we'll have this name as a raging long on our Best Idea list sometime over the next 12 months. But we think that will be at a much better price than $28. Don't underestimate how low this name can go given the debt burden. Take the earnings multiple and throw it out the window. It's all about EV/EBITDA x Leverage and directional movements in cash flow, which are negative.
Chewy (CHWY) | When is CHWY Cheap Enough? The stock has been incredibly weak over the last couple months. We’ve been saying it’s too early to get incrementally long of CHWY given the weakening growth TREND in the model and high valuation in a challenged consumer environment. Macro will continue to be an issue over the near term, but we continue to believe this is a long term winner, at some point we think you can’t ignore the upside cash generation potential over a TAIL duration. Stock is down to about 18x consensus EBITDA. We think there is some upside on profitability in 2H. In trying to outline a “floor” through sustainable cash flow, if we work through some back of the envelope math in the model, and isolate the business to the core autoship customers (~$8bn in trailing revenue and continuing to grow), assume minimal growth but improved profitability both with slightly better gross margin and slashed marketing, we think you can build to a sustainable $350 to $400mm in EBITDA. At a 12x multiple, you are around $5.5bn in equity value, or a stock around $12 to $13. That’s about the level we think the stock gets too cheap to ignore even with an absence of the growth trajectory improving near term. We think over a TAIL duration this stock can again visit the $50+ level, but not to the point we are going to raise it on the long list.
Monro (MNRO) | Short Not Done Yet. The short has been working really well over the last couple months, down 25%. We don’t think it's time to cover here yet though. Visits trends have been weak and slowing, while the consensus expects a hockey stick rate of change improvement in fiscal 2H (Mar end). Street is at $1.50 implying a high-teens multiple, but we think the earnings has another 20% to 30% downside and the multiple shouldn’t be much higher than mid-teens. That suggests downside risk to $20 here (currently at $28). MNRO remains a Best Idea Short.
MercadoLibre (MELI) | Adding to Best Ideas Long List. While we remain bearish on the near term US consumer setup, the TREND outlook on the core MELI markets is much more bullish. We have a positive Macro Quad outlook which creates an environment that is supportive of strength in consumer spending and consumer equities. 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 remaining under severe financial pressure. Meanwhile, this is a secular growth story as MELI is the ecommerce leader in Central and South America with a margin expansion story as the company scales up its high margin advertising business and grows revenue leveraging other expense lines. There is a high probability of Macro Quad 2 (growth and inflation accelerating in Brazil (54% of sales) for 4Q23. The macro outlook for Argentina (24% of sales) is currently Quad 1 (growth accelerating and inflation slowing) though with a moderate 54% conditional probability. Mexico (18% of sales) is also projected to be in Quad 1 in 4Q. 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 8 months back. The setup is positive for MELI to win share in what is a strong secular growth category of online retail. 2Q saw a nice beat and acceleration, and we think the top line will continue to accelerate here in 2H. Our model is coming out about 10% ahead of the consensus on EPS for 2023. We’ll keep this on a relatively short leash given the near term alpha we expected is partially related to the support of the TREND macro setup, should that change our conviction level here might as well.
