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.
Skechers (SKX) | Upping to Best Idea Long list. Given how bearish we are on retail, as we'll outline in our Retail Themes Deck tomorrow (Live Video Link CLICK HERE), the list of names where we have conviction of an earnings beat and underlying earnings trajectory is slim. SKX is one of those. The key thing to keep in mind is that brands like Nike and Adidas are pushing the upper echelon of price points and are routinely going $200+. That's leaving SKX alone in the $75 price point range where it’s taking share and is by default building a better competitive moat around its core. We also think that price increases are in the cards for SKX -- only by something in the $5 range. The consumer won't know the difference, but the P&L will. This is a name I've been net bearish on for the better part of 30 years -- and the company has given good reason for that with a blowup about every two years. But ever since it branched out to everything from performance running, and more fashion-forward non-sneaker styles (check out the knockoff Birk's -- they're spot on and sell for 65% less), performance has been more stable. We're also getting more comfortable with management and corporate governance, which has always been a problem at this company. For the quarter, we're at $0.91 vs the Street at $0.79, and we are building to $5.00 in EPS power over 2-years. People will then start to eye $6 in EPS power. We think SKX will get a 15x multiple on that number, getting to roughly a double from today's $48. Definitely worthy of Best Idea Long status.
Designer Brands (DBI) | Adding to Long Bias List. The company designs, produces, and distributes footwear and accessories. It operates three retail banners, Designer Shoe Warehouse (DSW), The Shoe Company, and The Shoe Warehouse, and owns or is the licensee of various brands. The retail banners offer consumers a key value proposition; on-trend styles from well-known national brands at lower prices. The brand portfolio includes Vince Camuto, Jessica Simpson, Lucky Brand, Keds and Hush Puppies. The stock ripped +20% after the print, and while we're usually remiss to add after a run, the reality is that the consensus estimates are too low, there are sales and earnings catalysts to the upside, and the stock is dirt cheap. This company has been comping down near 10% for 2-years, and the primary reason is that Nike exited from DSW two years ago. It's returned this season, which is a major traffic driver, and we think that people are underestimating the impact. Then there's the addition of the Keds brand, which DBI just bought from WWW, as well as the license for Hush Puppies. It's also the dark horse to acquire Sperry from WWW -- which is on the block. We think DBI beats the upcoming quarter, with earnings of $0.61 vs the Street at $0.47. More importantly, next year we think this company will earn $2.21 vs the Street at $1.54. At $12 this name is trading at just 5x next year's earnings. If we're right on the top line and margin inflection, we think this name could trade at 10x earnings in a heartbeat, suggesting 80% upside from current levels. This is a Best Idea candidate, and might make it there as we get deeper in our research. The focus of our work now is on the margin impact of Nike and Keds. Keep in mind that this company has razor thin margins of 5%. That's a double-edged sword. The slightest move in either direction will have an outsized impact on EPS and EBITDA. But our initial research says that the marginal change will be to the upside.
Allbirds (BIRD) | Taking the loss on this one. Removing from our Long Bias list. Great tax loss candidate. The reality is that this brand has the least heat out of any publicly-traded footwear brands (with the exception on Vans -- VFC -- where we're also starting to question the long case). At this point, you need to own it for a take-out, and while it makes a ton of sense for PE, there are no strategic buyers that would touch this with a 10-foot pole. The most likely outcome we can hope for is an activist shareholder (like you have with Purple) that takes a majority stake, fires management de-emphasizes the ESG angle (which only works if it leads to brand heat -- and it's not), which would make this a multi-bagger. Furthermore, the latest 'innovation' for the company leaves a lot to be desired, and its settled into a heavy discounting model in its core product offering, which is no good. Do we think this is a Zero? No. But barring a strategic action, which we'd rather not speculate on, this stock is likely a perma-bone.
Purple Innovation (PRPL) | Moving Higher on Long Bias List. This is one of our highest conviction 'multi-bagger bones' -- trading at just $1.40. We've seen better traffic trends at mattress retailers in recent weeks. By no means are we calling the bottom, but keep in mind (after our short call on the group) this space was the first consumer segment to turn down in late 2021 to early 2022. It's going on the end of year 2 of -10% demand, which takes the cycle average back to about flat. At the same time, remember that PRPL had an offer to outright buy this company at $4.65. Coliseum wanted to own it earlier this year, and it likely still wants to own it today. The consensus has this company losing money through 2025 -- but we could see PRPL putting up $0.50 in EPS power over that time frame. One thing we like a lot here is that this company has a pristine balance sheet, with very little risk of levering up as the tail end of the downcycle plays out. Likely to get better than a 10x multiple on TAIL earnings power. 15x not out of the question. And if it puts up $0.50ps, people will be eyeing $0.75 to a buck in EPS power in the following years. This could be well over a $10 stock and again, it's clocking in at 'bone' status. We really like the upside/downside potential here.
Birkenstock (BIRK) | Get Ready To Short It. The company currently plans to price the deal after the close on Tuesday, and it looks like demand is coming in such that it will be at the high end of the range ($44-$49 per share). As we outlined in our pre-IPO Black Book last week -- we'd recommend putting in for the allocation, and then selling it 5 minutes later. Fair value for this stock when the dust settles is about $30. Catterton striking while the iron is hot on this one, and its to the detriment of shareholders. Six months down the road -- if not much sooner -- this is on track to be a broken IPO. Sustaining a $9-10bn valuation is a pipe dream. We think it's worth $6bn, nearly 50% higher than where Catterton bought it just two years ago. Full details and modeling assumptions in our Black Book, for the Video Replay and Slide Deck Link CLICK HERE.
