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.
Adding Savers Value Village (SVV) to the Short Bias List. Over the past few weeks, we have received questions about the recent (and now broken) IPO Savers Value Village, which operates 318 secondhand thrift stores around the U.S., Canada, and a few in Australia. The company has a long history of profitability and positive comps in 15 of the last 16 years – with a strong value prop, unit growth story, and ultra-high margins. But after digging in a bit more on the name, we are finding extreme post-pandemic margin risk and clear negative directional trends in the business. For one, margins saw a major lift during the pandemic as on-site donations (OSDs) of supply (donations made directly to Savers stores) grew substantially relative to delivered supply (donations made to non-profit partners then brought to Savers stores). These on-site donations cost SVV one-third as much as delivered supply, and when they went from 53% of total supply in 2019 to 75% of total supply in 2020, gross margins exploded from 51% to 58%. Since FY2020, OSDs as a % of total supply continue to trend back down toward pre-pandemic levels, and margins are beginning to follow. We think there is further significant GM risk given the model’s sensitivity to supply dynamics, and in doing the math, have determined that GMs could revert to near pre-pandemic levels given any continued drop in OSD volume. SVV is also facing further margin pressure (175bps in 2Q23) due to rising personnel costs within COGS for those processing the donated goods--these jobs are likely competing on entry level wages. Wage inflation will be a pressure on a store level as well, particularly as the company grows, but recently has been offset by increasing the self-checkout offering. We do not see these cost trends reverting any time soon, which only means more margin pressure for SVV moving forward. Not to mention, topline rate of change is slowing from +30% a year ago to up MSD, the balance sheet is 2.5X levered while the company is operating a capital-intensive growth plan, and it’s still trading around ~10X EBITDA. SVV will also face major near-term selling pressure as Ares Management (which took SVV public) still owns 86% of the shares outstanding, is sitting on an estimated ~3X gain, and will be able to start selling stock on December 26, 2023 once the lock-up period ends. Although this is a name we could be long once rate of change bottoms, gross margins settle out, and selling pressures subside, the near term trend is clearly directionally bearish and short-term risk far outweighs the potential reward. Given the near-term leverage, margin and PE overhang concerns, there's no reason why this name can't trade as low as 5x EBITDA. We're still stunned as to why the company didn’t upsize the IPO to leave it debt free -- but instead it's sitting on a cool billion in debt just as store expansion is accelerating and we're headed into a recession. A 5x EBITDA multiple suggests a $5 stock. Huge downside from its current $15. Don't underestimate the power of how low levered PE-led IPOs can trade -- especially in a recession in its two core markets. We're doing more work on the TAM here, and new store economics. It could be an interesting long someday, but not at this price, and definitely not at this valuation.
BIRK (Birkenstock) | Or should we say Brokenstock. Adding to Short Bias List after breaking bad post pricing. Still downside to come. We couldn't have been more clear in our pre-IPO Black Book that this was going to go down as a horrifically broken IPO. It traded down 12% on Day 1 of trading, then down another 7% on day 2. Yes this brand is hot, but the reality is that the bankers got greedy with valuation. Catterton seemingly wanted to price this at $6bn six months ago when rumors cropped up around a deal. But the bankers stirred the pot with demand and somehow justified an $8.6bn valuation when it finally priced. Yes the bankers got paid. Yes, Catterton got paid. Yes, shareholders that were allocated stock on the IPO got hosed. Big black eye for Goldman, and the IPO market as a whole. We think we're too early to be in an IPO cycle, when the leverage/consumer downturn/bankruptcy cycle has yet to play out. Is BIRK a raging short here? Probably not. But we think it hits $30 vs its current $38. We wouldn't touch it long side until it trades into the low 20s, which will likely happen if and when the company fails to comp a ridiculously price/ASP-driven comp next year. To be clear, this a great brand. But buying into the amount of brand heat it has today is simply reckless. For our IPO Black Book CLICK HERE.
Pandora (PANDY) | Taking Higher on Best Idea Short list. This company is polarizing right now. It's either a monster long, or a raging short. We come up squarely in the 'raging short' camp. The crux of the debate around this name is whether it can transform itself from 'that charms company' to being a curator of higher priced jewelry -- which is where the company is headed. This sounds a little like Movado, that had the 'genius' idea to make knock off Rolexes and sell near a Rolex entry level price point. Across Consumer, there are maybe three brands that we can point to that have successfully changed the consumer perception of the brand to being something higher-end than it had been historically. It is VERY difficult to change the consumer's perception of a brand. RH did it -- and it took 10-years. Coach did it, and it took 5 (about as fast as we've ever seen a brand change its customer base). Keep in mind that Pandora's gross margins of 78% are already higher than Tiffany's. The likelihood of this company changing its brand perception over a 2-3-year time frame (management's guidance) without a big inventory build, and Gross Margin impairing discounting levels, is 10% or less. We'll take that bet any day. This company should simply stick with the status quo, generate cash, and de-lever (it has $1.1bn in maturities in '27). We think the strategy is wrong, the consensus earnings are wrong, and this stock will be 30-40% lower as it revalues on a lower earnings base -- and the business model is called into question. The company is only growing earnings by about 4% this year, as the category (40% above pre-pandemic) mean reverts. Next year the Street is underwriting 17% earnings growth. We're modeling earnings to be down for the year. The bottom line is that it has a wildly profitable model today, and should stick with it. This growth plan outlined in its analyst meeting is riddled with risk. Highly unlikely that it will become a hub for people to go buy engagement rings. We'd short this one TODAY. We think there's 30-40% downside over the next year on an earnings miss, inventory bloat, GM hit, and revaluate lower than its current 8x EBITDA multiple.
H&M Hennes & Mauritz (HNNMY) | Taking Higher on our Best Idea Short list. This one has gone against us since we put it on. As we do all of our ideas, we consistently evaluate whether the fundamental call is right -- or whether we're offsides. This is one where we are highly confident that the TAIL call will play out, just as we head into a recession making the TREND call that much more palatable. The first problem here is generational. This company was the poster child for Fast Fashion, which had its big run 20-years ago and disintermediated the likes of The Gap, Abercrombie and even the Department Stores. During that time period it built to a global fleet of 4,800 stores -- which a simply stunning number. But then along came this thing called the internet, and now we're seeing the rise of SHEIN, which is disintermediating the disintermediators. Never mind the added negative impact of all the shopping sites on Instagram and now Temu, which makes H&M (once cheap) price points look flat-out expensive. Over the past three years H&M has lost share to these new 'generational' means of shopping. It's now in store closing mode. And we'd argue that the fleet won't be fully rightsized until it has closer to 3,000 stores. And that might even be too many. Over a TAIL duration, we're modeling EPS of 6.22 SEK vs the Street at 11.40 SEK. The stock might look cheap at 5x EBITDA, but there's no reason why this dying retailer can't trade at 3x EBITDA, especially over the next 12 months as the category and the global consumer in aggregate comes under increased pressure -- particularly in the Americas and Europe and Africa which collectively account for 88% of sales, and well over 90% of cash flow. If our model is right, we get to 30% earnings downside next year, while the company is shrinking its store fleet -- and SHEIN goes public. At 4-5x EBITDA, that suggests a 92 SEK stock, or 40% downside from here. 
Wayfair (W) | Shifting Lower On Best Ideas Short List. This short call is far from over, but the market is waking up to the risks around a slowing consumer and increased competitive intensity for W against companies (AMZN, ETSY, OSTK, and more) with much better balance sheets and margin room within expectations to spend on marketing and discounting to win share. Wayfair has promised both top line growth and margin performance, but the company is going to have to spend up to drive growth in the upcoming holiday shopping environment with consumers tightening spending. The stock is down about 30% since last time we elevated this on our Best Ideas Short list in July and down 42% since we reiterated the conviction short at in early August. This is one of the most squeeze prone names on our short list, and is currently sitting at 29% short interest. We think this has another 30% to 50% downside risk, but risk reward warrants it being lower on our list after the big correction in the stock.
