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.
European Wax Center (EWCZ) | Adding Short Side. This one is starting off on our Short Bias list, as most new ideas do (they either move up to Best Idea or get booted as we go deeper on the research call), but we don't see how you get hurt being short this name at $14. We're actually fans of this business model -- and initially thought it would be a long as we started our work. You have a sticky customer base (no pun intended), a very good value proposition, solid 4-wall economics, and the company can probably triple its store base to 3,000 stores. But the way we see it, if you want to profit from EWCZ, open up a franchise -- which you can do for about $356k -- don't buy the stock. The reality is that this name is a broken IPO -- trading at $14 after pricing at $17 at the start of post-pandemic reopening. It's 3.6x levered, comps have been decelerating, and there's a 'non zero' chance that comps go negative in 1H24. Furthermore, 99% of the store based is franchised, and while the average franchisee owns 4 locations (and generates significant cash flow accordingly) it's not unlikely that unit growth slows in a higher interest rate environment. So the risk of slowing unit growth and negative comps are out there -- again, for a levered company, and a stock that trades at 29x earnings and 13x EBITDA. This kind of reminds us of the car wash business -- which had an artificial floor of 14x EBITDA until people realized how economically sensitive the business is. Multiples there have since been cut in half. With these risks for EWCZ, the only thing that will prove them wrong is time -- and the consumer. And given the stock characteristics -- valuation, leverage, failed IPO -- we wouldn't touch this long side unless we can model material earnings upside, which we're not likely to see with an increasingly strapped consumer. Knowing what we know today, we'd be buyers of this stock closer to $5. More research to come on this one (and we were serious about the opening up a franchise -- the math works).
Canada Goose (GOOS) | This week's print, and more importantly, the guide, should validate our short case. Expectations for the quarter look fine, with the Street looking for a loss of ($0.16) -- a big negative swing from earnings of $0.16ps last year. But this is still a relatively unimportant quarter seasonally. The big news should be the read into the all important Dec (3Q), where the Street is looking for a mind-numbing 47% growth to $1.40. We think the company will be lucky to earn half of that, as both global DTC traffic weakens, conversion heads lower, discounting steps up, wholesalers cut/cancel orders and inventory bloats. We're a broken record in saying this (since the stock was ~$30 -- it's now at $11) but this is a broken brand, a broken company, and a broken stock. We think underlying earnings power is at best $0.50 annually, which is good for a $5 stock. It could get cut in half again from here.
Driven Brands (DRVN) | Reports Earnings Wednesday Before the Open. The stock is starting to look very cheap at 10.3x street earnings and just under 8x on street EBITDA. If you believe the company’s $850mm target (which we do), it’s just over 5x EBITDA on that number. Right now though, leverage and the rate of change in the business are pressuring the equity value. And the market has applied a very different valuation framework to car washes after the company talked about competitive threats and market density issues. Visits trends look to be moderating in some of its core concepts (Take 5 and Meineke). The consumer is deferring maintenance on vehicles given the building wallet pressure from hits to discretionary income and rising energy costs. We’re not sure this print will be a major catalyst either direction, the stock appears to be expecting some cut to earnings, and trend suggest there could be one (after all the first guide down in retail is rarely the last). We like the TAIL setup for DRVN as we think you have a path to a stock triple even on lower multiples than the space has typically seen.
Wayfair (W) | Reports Earnings Wednesday Before The Open. We wouldn’t be pressing W into this event… that stock has fallen over 50% from its summer highs when we were elevating the short on our Position Monitor. And we just recently shifted this lower on our Best Ideas Short list. This is one of the most 'squeeze prone' names on our short list, and is currently sitting at 28% short interest. There is a wide range on where EBITDA could come in this Q, we’d think it meets or exceeds expectations. The company is cutting costs, has room to take charges on restructuring efforts, and it’s probably going to do what it has to do and say what it has to say to keep the bulls happy. The top line we think has a lower probability of beating. Though ecommerce in total looked solid for the US in 3Q, we don’t think home was a category of focus and we saw OSTK miss despite investments in driving top line in the Q, pressuring margins. Google interest for Wayfair in the US appears to have slowed in recent months. We think the expectations of accelerating top line trends with positive margin performance is going to be hard for the company to deliver over the coming quarters, especially as consumer spending continues to be under pressure and the home retail environment feels the pain of reduced housing turnover. The balance sheet is still a problem, with $3.2bn in debt, $1.2bn in cash and $900mm coming due over the next 2 years with sustainable free cash generation being something the company has yet to prove it can deliver. We think you have another 20 to 40% downside risk, short any strength on the print.
Acushnet (GOLF) | Bearish into Thursday’s Print. GOLF could hit/beat the numbers on the headline, but we think the cracks will be there to suggest that the earnings headwinds for GOLF are building. Last quarter revenue slowed and demand cracks appeared in Footjoy footwear and other revenues. The company starts to lap the driver launch of last year in 2H while launching a new line of irons. Irons, however, generally have a lower turnover rate within the bag due to less average wear and less perceived benefit from any new tech innovations. So those elevated golf club replacement trends of the last few years start to become a drag, then in 1H24 the company will be a lapping this year's new ProV1 ball launch at the same time we expect to start to see rounds growth go negative. We’ve seen rounds growth slow on easier compares in recent months (below). Visits trends to golf retailers have also slowed significantly. Last Q management also talked about the return of promotions after a couple years of no promotions, and hinted at some pockets of inventory build for the industry in clubs. We’re seeing multiple generations of clubs across competitors sitting on retail racks at 3 different price points. As the consumer continues to feel the wallet pressure, expect golfers to defer purchases or look to trade down. Business trends implied in last Q’s guidance (smaller upward revision than the beat) suggests a rather big drop off in sales growth and profitability into 2H, the company is apparently crediting expense timing to a certain extent for the profitability hit. Still, with revenue likely to slow and at risk of declines, and margins at peak, the P&L direction looks like one that is not supportive of multiple expansion. Keep in mind the new CFO has started after the veteran CFO retired. Maybe there is risk that the other CFO slightly juiced EBITDA in the end of his tenure, and now the new CFO has to manage forward expectations. We’re coming out with forward EBITDA of $325mm with the street at about $365mm. At 8x to 10x EBITDA that puts the stock at about $29 to $39 or 20% to 40% downside.
Floor & Décor (FND) | Reports Thursday After The Close. Our Short call on FND has been working, after being wrong for the first 6 months or so. Earnings numbers have come down a lot, but given the continued pressure on housing turnover, we think numbers are still headed lower and this still carries a big multiple of ~30x P/E. Once we see a demand trough in housing and home turnover starts to pick up FND has serious earnings upside juice on the other side given the unit growth and building store maturity tailwind. But over the near-term, comps remain under pressure, evidence by visits slowing for 3Q running down in the double digits. FND remains a Best Idea Short.
For details on how we are thinking about the demand drivers in the Home Improvement space see our Home Improvement Deep Dive. Video Replay and Slide Deck Link CLICK HERE
The Container Store (TCS) | We’re cautious on TCS into this weeks print (Tuesday after the close). Visits trends have weakened since the company guided, and though we would like to say that the company has guided low enough, the expectations weren’t low enough into the last print despite a big guidance cut on the 4Q print. The home retail ecosystem remains under pressure and TCS is not immune to the demand pressure of home turnover being in a depression. Beyond the sales and margin trends, a big aspect of the near-term investment case is the balance sheet. The company had plenty of liquidity on the last print, and the CFO has guided to positive FCF for the year, but the company also has floating rate debt, meaning the recent rate move is applying more pressure on the company. The near term is unlikely to be a bullish catalyst. We think TCS presents unique risk/reward as it is a “Bone” that has the potential to be a multi-bagger on a unit growth story in a recovering home/consumer environment over a TAIL duration. The stock is trading as if there is some dilution event to come before the company can attempt to execute its growth strategy. If the company can deliver on FCF generation this fiscal year the stock should be heading higher.
Revolve (RVLV) | Best Idea Short Reports This Week. This has been a big winner for us, having shorted it at $50 and the stock is now trading at $13. But we still think there's downside from here. The number of sale items at Revolve continues to grow weekly. The company started the quarter off with July down MSD and guided to the same type of sales cadence for the remainder of the quarter. The Street has the company at a steady down state from the prior quarter, down MSD, with margins still down YY but slight sequential improvement from the prior quarter at the top end of company guidance. Given the size of the sale section increasing, we’re expecting the GM to be at the low end of the range. We expect that customer growth will continue to slow for the fifth quarter in a row, which is a critical piece of our short call. Last quarter, RVLV's higher-end brand FWRD had a tough print, and with all the other weakening luxury data points out lately, we don’t expect this part of the business to be any different. While the stock has come down over 35% since the last print, with our $0.64 EPS estimate for next year, the stock is trading at around 20x – 1.5 times where it should be for a business that’s running out of TAM. Knowing what we know today, we’d cover this stock closer to $8 vs $13 today (low teens multiple on $0.64 in EPS).
Carvana (CVNA) | Could Squeeze on Solid Report but Still Long-Term Short. CVNA has nearly been cut in half from $50 when we shorted it two months ago, and we wouldn't be surprised to see a squeeze on this quarter (the company reports Thursday November 2nd after the close). Expectations are high after posting its first quarter of positive Adjusted EBITDA since 2021 (only the 3rd quarter ever), but trends and important performance indicators across the industry are clearly weakening and CVNA has a multitude of major issues of its own. CVNA has been particularly weak as profit per unit came under pressure across the ecosystem over the past two months. In August CVNA raised its 3Q guidance to Adjusted EBITDA of over $75mm and Non-GAAP Total GPU above $5,500 and the street is currently sitting at $66.3mm and $5,685 respectively. While CVNA could surprise to the upside this quarter (and maybe 1 or 2 more into the future) due to its ability to sell off its backlog of loans to Ally—which is then added to Adjusted EBITDA and GPU—we think long term estimates are far too high and that numbers will go lower. In other words, we'd press on a squeeze (38% of the float is short). As we saw with the auto retailers that reported last week, GPUs are clearly under pressure with Used GPU down on average -9% (decelerating from -7% in 2Q) and Finance and Insurance GPU down on average -7% (decelerating from -2% in 2Q). Not to mention CVNA still has a massively stretched balance sheet with over $6.5bn in debt and roughly $500mm in interest expense. After the loan tailwind ends, 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 20x ambitious 2025 adjusted EBITDA numbers.
Arhaus (ARHS) | Trends Still Look Soft -- The Stock Could Go Either Way On This Print. We moved ARHS from our Best Idea Short list to our Short Bias list after a 30% draw down to about $8. While the Street is looking for a sharp yy decline in EPS starting in the September quarter (which it should) -- it's looking for a return to growth in 2024, which might be optimistic. Trends still look weak (see visits data below), though the stock is trading at a much more reasonable 10X Earnings and 7X EBITDA with the Street expecting a continued deceleration in sales and margin compression. Remember that ARHS is still fulfilling demand from orders placed over the past year, which makes its revenue trend look far better than its underlying demand trend. As we highlighted last quarter, we think the real demand comp could trend down 18-20%, which will massively de-lever the model, which is the sole reason we're staying short the stock. Short interest is down to only 8%, so less squeeze risk this quarter on a positive report, but do not be surprised either way. Overall, we still view this name negatively, but with the stock sitting at $8.25 (compared to $12 before the 2Q report) we wouldn’t be pressing this one on the short side into the report.
MercadoLibre (MELI) | Reports Earnings Thursday After The Open. 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 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 9 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.
