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.
Capri Holdings (CPRI) | Best Idea Long -- Again. At $51, CPRI might just offer one of the best returns in Retail over the next six months. For many reasons we articulated in our recent Retail Themes deck (click link HERE), we think Retail is headed lower, and with the XRT sitting at trough multiples right now, we think that it will look more expensive at a lower price. The 'E' in the equation is simply wrong. But CPRI is being taken out by TPR (which we think is a great short here at $57), and we think there is an extremely high liklihood that the deal goes through. Financing has already been secured, and if anyone were to oppose the deal, we'd have heard about it by now. We weren't expecting any opposition, as the merger will lead to better product at Coach and Kors, with less discounting/promotional activity in the space. The FTC is highly unlikely to block this deal -- as it almost certainly won't segment the mid-tier handbag market as its own unique segment of retail. It also has much bigger fish to fry and likely has little room to scrutinize this deal, especially given the lack of opposition from competitors or customers. All in, we think we're highly likely to see this deal close within six months 12% higher -- making for a 24% annualized return. That kind of return is ordinarily not enough for us to make something a Best Idea, as we look for a much bigger return, the degree of confidence we have that this deal happens alongside the fact that we think the rest of retail (even half of our longs) are headed lower makes this one too great to ignore.
As noted, we'd pair this against TPR (Best Idea Short), which we think is headed lower. TPR is looking at this deal with a 5-10 year time horizon, which is a gross mismatch between the company's transformational approach to this deal and even the longest duration you'll find on the Street. The company will go from no leverage to ~4.2x leverage on the day of closing, and then will likely severely curtail distribution of Kors product, taking down EBITDA. In all, we could see leverage approach 4.5x-4.8x in a downward revision cycle, which could take this name to 6x EBITDA (both names have traded below that in past downcycles). That's good for a $10 stock -- sizeable downside from its current $28 (we shorted it at $34). At some point, the de-levering story here will be powerful, and the portfolio with Jimmy Choo and Versace will be worlds better than what TPR has today. It can also eliminate the grey area where Kors and Coach compete aggressively today. All good stuff. But that doesnt matter today. We think we'll be long TPR in a years' time, but at less than half the price it trades at today. For our TPR/CPRI Black Book CLICK HERE.
Skechers (SKX) | Bullish Into Thursday's Print. Best Idea Long.
Tractor Supply (TSCO) | Added to our Short Bias list concurrent with our Home Improvement deck on Friday. For details on the Home Improvement demand landscape and initial thoughts on TSCO, including our earnings estimates see REPLAY | Home Improvement Shorts & Updated Scenario Analysis Black Book Video Replay Link CLICK HERE
Amazon (AMZN) | Reports Earnings Thursday After The Close. AMZN is a Best Idea Long and the crux of our long call is visibility to a path over the next few quarters for the top line to accelerate, gross profit to do the same, and for the company to deliver massive EBIT growth given cutting out unprofitable spending across areas of the business. (For our note see AMZN | Elevating To Best Ideas Long List). Since the last quarter was reported, data points are supportive of our view of Amazon to see rate of change acceleration. US nonstore retail, where AMZN is a major player saw sales accelerate 60bps against a tougher comparison, and the 4Q compare eases. Meanwhile we think AMZN had a successful Prime Day back in July and continues to win share in online retail while online is back to taking wallet share from Brick and Mortar. We expect that share gain to continue in 4Q and early reads on 4Q online shopping and Prime Early deals also appear bullish. One important piece to watch on the print this week will be AWS performance and commentary. It was clearly implied that the segment had found a growth bottom at 12%, any slowdown would be a clear negative. We’re modeling revenue slightly ahead of the street, and EBIT to beat by about 10%. We think the company guidance straddles the street, with the top end implying upside to 4Q street numbers. The one intra-quarter data point that gave us some concern was the holiday hiring coming in at 250k, nearly 2x last year (150k) and ahead of 2019 (200k). That’s a positive read on demand, but perhaps presents some incremental margin pressure as the company always strives to deliver for customers around holiday.
Warby Parker (WRBY) | Adding to Long Bias List. We're still working on the precise timing here on when to go long (which is when it will likely be a Best Idea), but we've pulled a 180 on WRBY. After successfully shorting the stock at $45 and covering at $14, we think the time is nearing to go the other way. Initially, we had a problem with the store economics. The company has a value-priced offering, but was opening stores in ultra-premium locations which de-leveraged occupancy expense and posed meaningful margin risk. But WRBY is entering the second phase of its store growth plan, after opening 220 premium locations it is opening up stores in B+ locations, which cost materially less, but are exactly where its target market lives. We could potentially be looking at higher productivity on what will certainly be lower occupancy costs. When we model that out over a TAIL duration, that gets us to a 500bp lift in Gross Margins. Add that to a company that is likely to quadruple its store base -- getting to 900 stores in a space where there are 40,000 (ripe to be disintermediated) Mom and Pops in a sector of retail that holds up very well in recessions, and we think it makes for a juicy long. The part of the eyewear industry that turns down in recessions is the market for $500 Tom Ford eyeglass frames, not the contacts or $95 frames you get at Warby. Again, we're hesitant about adding any long ahead of a recession, and this name carries a +20x EBITDA multiple. But if we're right on TAIL earnings, this could be a multi-bagger in the teens. More to come on this one.
Monro (MNRO) | Reports Wednesday Before The Open. We reiterated the Best Idea short a month back, stock has already gone from $28 to $25. The short has been working really well with the stock being cut in half in less than 6 months, and the XRT down only around MSD over the same time period. The market is clearly expecting some kind of earnings revision here, as the management team has stuck with a high bar on the sales side for its fiscal years (March end). Visits trends have been ugly (chart below), likely playing a role in the stock weakness. Multiple is down to about 15x on consensus, street at $1.56 for the fiscal year. We think we’ll see closer to $1 to $1.25. With MNRO being a clear share donor after underinvesting for years, the multiple shouldn’t be much higher than mid-teens. That suggests downside risk to $20 here. Short interest sits at just under 11%. Given the stock move, this isn’t one we’d press into the event, but we remain short and would add on any strength on the event, particularly if management doesn’t take a big cut out of the earnings guide.
