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.
Williams-Sonoma (WSM). Removing from Best Idea Short list. This one is painful, because fundamentally, this P&L is headed in the wrong direction. The Street is underwriting $14.50 in earnings next year, and we think it will earn closer to $10. But we need to acknowledge that Leonard Greene recently bought a 'passive' stake of 5% in the company. We've seen LG take passive stakes before -- they don't always work out well. But this name now has a valuation floor where it's unlikely to trade on the typical trough multiple on trough earnings. That is the unwritten rule in retail -- because people will point to Leonard Greene stepping up and buying the whole business outright. It wouldn't be a horrible idea. This company has good, not great, assets. But terrible management. LG can clean house, put in a professional management team, unlock $20 in EPS power, and take this public in 3-5 years. We simply can't fight that narrative -- nor do we want to. Few things worse than being right on the model and wrong on the stock. We have ~75 other shorts on our list that are worth fighting the good fight. Moving on from this one.
FIGS (FIGS -- Best Idea Short) | Moving higher on Best Idea Short List after an epic squeeze on Friday. The company definitely picked the right retail tape to report earnings. It beat by a penny and took up guidance for the year. And yes, the stock was up 26%. We're still squarely in the black since shorting this name closer to $11, but at $6.81 on Friday's epic squeeze, we'd press it. Simply put, we think management is way too confident in the sustainability of its gross margin. This team was in business school during the GFC -- they're never seen a cyclical downturn, and have yet to feel the impact of competitive pressures that are emerging in a category which (to its credit) it created. This is a category that hasn't been innovated in 100 years, and FIGS did a great job bringing new styles and aesthetics to healthcare professionals. But the company is sitting on a 70% gross margin, and we think that over a TAIL duration, that slips to the low 60s. With opex ramping around SKU proliferation and International growth (which is never as profitable as core US growth) we think this company will remain at break even for years to come. It trades at 56x earnings and 11x EBITDA -- both of which are way too rich for a company with such risk to the P&L. We'd short more here.
Capri (CPRI -- Best Idea Long) | Nothing from the Print To Risk Derailing the Deal. CPRI management is focused on one thing, and one thing only right now -- running this business to stick within the confines of the merger agreement and get this deal done at $57 -- something we fully expect to happen. So long as CPRI doesn't do anything like cut off sellers, or change suppliers, there's nothing TPR can point to in this quarter to break the merger agreement. Nor do we think either party wants to. To be clear, TPR is thinking 5-10 years out with this deal -- not aligned at all with Wall Street's typical time frame. And that's ok, but we think it presents real opportunity in generating alpha in going long CPRI for an 11-12% return over 4 to 6 months (not too shabby when the rest of retail is likely to go down). And then shorting TPR, which could have leverage pushing 5x after taking down EBITDA while it cleans up Kors distribution at wholesale following this deal. Why can't TPR trade at 6x EBITDA? It's been below that before. That’s a $10 stock vs $28 today. Also, to be clear, when it gets there we're likely to go long in a very big way. Within years 3-5 of the merger, there should be enough cash flow to take leverage down to zero, and this will be a high return unlevered business with growth optionality from Versace and Jimmy Choo. Those pieces will be smaller as a percent of the total given the size of Coach. But they still exist and dwarf Kate Spade and Stuart Weitzman as it relates to profitable growth drivers. For details on the merger and our positioning, see our Black Book HERE.
Ralph Lauren (RL -- Best Idea Short). The company reports Wednesday before the open. The expected -14% earnings growth looks reasonable, but we're expecting a guide-down for the company's fiscal 3Q. We have seen the company consistently take up price points all while putting up minimal growth over the last few quarters. In fact, more than 100% of growth has come from price -- suggesting that it's firing its core customer base. That can unravel on a late-stage brand very quickly. The company is struggling with a brand perception problem; wanting to appeal to younger consumers but doing so unsuccessfully. The company guided for both Q2 and the year to see strong growth, with Europe and North America weaker—up LSD and down LSD respectively. The success in Asia will not be sufficient to continue to offset the declining popularity in North America and Europe. The Street is expecting sequential improvement in Q2 and Q3 and a deceleration into Q4, on a company-wide basis. This stock has been stuck at ~$115 for the past three quarters -- meaning that it's outperformed retail. The reality is that it looks cheap at 11.4x EPS and (less so) at 8x EBITDA. But our contention is that earnings expectations, particularly for '24 and '25, are too high. Once this category -- like so many others in retail -- sees pricing pressure as the strapped consumer pushes back on companies that have elevated margins due to price increases, RL will be one of the first to fall. We're underwriting TAIL earnings power of about $8 per share, vs the Street at $11. Do we think there are better shorts out there? Yes. But this is one that we think should work down to $80-$90.
Interparfums (IPAR -- Best Idea Short). The company reports Wednesday -- VERY High Expectations Stock. We’ve been short this for a while, and it hasn’t played out quite how we expected. Last quarter it put up an earnings beat, and while it raised prior FY EPS guidance, the implied guidance based on consensus was not really a guide up. The company saw an acceleration from Q1 to Q2 and the Street is expecting continued acceleration into Q3 of +31% YY but a drastic deceleration in Q4 only +7%. The company is launching new fragrances in 2H, which should help maintain YY growth, but the company has been experiencing outsized growth the last few quarters and that is not sustainable. Fragrances have been among the most resilient part of the beauty space, with the best pricing trends in the group. That has singlehandedly taken up IPAR's operating margin by 300-400 to about 17% -- a level which we absolutely do not think is sustainable -- especially in a recession. At $130, this stock is trading at 26x earnings, 16x EBITDA, and less than 2% of the float is short. Valuation is not a catalyst, but we think we've hit the upper end of pricing in fragrances, and the consumer -- even the luxury one -- will start to push back. We have TAIL margins going back to 14% -- as there is nothing structural that has changed with this company -- no higher margin contract wins and no cost reductions -- that explain away the margin lift. It's all price, and that can mean-revert FAST. Admittedly, we have been early and wrong on this short -- one of the few that has not worked out for us. It arguably trades like a staple, and is put in many staples baskets. Whether we agree with that or not, it's a fact. But another fact is that we're in Quad 3, and Staples are NOT where you want to be in Macro Quad 3. If this company fails to continue to take up guidance, the stock is likely to trade down, which we would not be surprised to see happen this week on the print.
The RealReal (REAL -- Best Idea Long). Reports Tues PM. Expect Progress. This company is still in transition mode under its new CEO. The stock traded off intra-quarter upon the news of the CFO getting the boot. We don't think that it’s because the company is about to puke the quarter, but rather the new CEO putting in place a team hand picked by him, instead of managing legacy executives from the former (toxic) administration. The company should lose money this quarter, likely to the tune of $0.25 per share, but that compares to a loss of $0.38 last year. Progress not perfection. Most importantly, on this call we expect to hear about sourcing initiatives the company has been working on -- again, keeping in mind that REAL rarely faces a demand problem – it’s all about getting supply. We think the company is working on ways to tap into importing supply from luxury markets like London and Dubai (there are tax and duty issues it's currently working around), and we also think it's close to striking a deal with a major European luxury brand to carry excess inventory for the brand on the TRR site, instead of jamming the product into high end department stores. What we like most about that is 1) it averts the highest cost associated with inventory -- authentication, as it's coming right from the brand, and 2) if it works, there's a call option to roll out with the remainder of said luxury house's brands. GMV is likely to be under pressure this quarter as the company hasn't lapped its decision to remove unprofitable lower-priced goods. But conversely margins should be up. We think the company will reiterate its goal to be EBITDA positive in 2024. Keep in mind that the consumer overconsumed on luxury goods during the pandemic and reopening, and now is sitting on considerable excess -- just as the economy is turning down, the personal savings rate is hitting a new trough, and leverage is racing towards new peaks. Cyclically, this should be a very favorable environment for TRR to source supply, and we expect that to show up in the numbers in 2024.
UnderArmour (UAA -- Short Bias). Zero brand heat or catalysts to the upside. We feel like we're getting greedy on this one, as the stock is down nearly 75% since we first shorted it. But the reality is that the brand has zero heat, and is facing increased competition from the usual suspects, but also newer brands like Vuori, Rhone, and even SKIMS (which is now endorsing athletes for its compression underwear -- going right at UAA's jugular). After posting -33% EPS in the June quarter, the Street has earnings about flattish for the balance of the year. Our sense is that is optimistic. Traffic to UA stores in the US has been squarely negative, and its only saving grace is China -- but that's hardly a market we want to put any stock in right now as the share shifts are intensifying -- likely away from UAA. The stock has rallied from $5 to $7.66, and our sense is that the only way out for this brand is if the new CEO materially ups R&D and Marketing to re-establish a connection with the consumer. Because right now its nowhere to be found. The stock isn't even cheap at 8x EBITDA -- there's no reason why it can't trade at 4x EBITDA unless brand heat accelerates. And to be clear, when we talk about upping R&D and Marketing, we're not talking 20-30%...we're talking 100%+. And that would take earnings squarely negative and make this a $2 stock in a heartbeat. Don't think it's possible? It happened once to the all mighty LULU back in '07. These brands are highly cyclical -- they have their own intrinsic cycles, and then are susceptible to economic cycles. Both are about to go negative for UAA. We're comfortable being short into this print and through 1H24.
Valvoline (VVV-- Best Idea Long) | Reports Earnings Thursday Before the Open. We took this lower on our Long list on 8/13 with the stock in the mid $30s flagging the risk around slowing comp trends. The visitation data over the last few months has slowed for +HSD to +LSD, and the stock fell accordingly. Ultimately, we think this quarter will look solid, we’re expecting an EPS beat of a few cents. The consensus numbers look to have the slowdown baked into expectations. Beyond the slowing comp trends the other thing dragging on the stock is the market multiples on other “comps” like DRVN that are in reality weaker business and/or more discretionary. In fact, the DRVN investor day about a month back had a section on Take5 that showed how powerful the quick service oil change businesses are, making us more confident in the VVV growth story. Ultimately, we think you are looking at the near-term pressure on the stock around those slowing comps and market multiple compression to find a good spot to be buying VVV for the TAIL upside, with much less downside risk in a recession than other names in retail that are far more discretionary. The CFO bought $200k in stock in the open market at $33.50, we think she sees the TAIL value creation opportunity as well. VVV has a path to $2.50 to $3 in TAIL EPS and a stock of $50+.
Canadian Tire (CTC-- Best Idea Short) | Reports Thursday Before the Open. We are bearish CTC into the print this week. Last quarter the company had to pull its long term guidance about a year after giving the 2025 target because macro conditions suggest they won’t be achievable. Data points out of Canada as it relates to macro and the consumer continue to be under pressure (i.e. in a recession). The recent development for CTC is that it bought back an equity stake in its credit card business that was owned by Scotia Bank. The company then noted it is exploring strategic alternatives for that business, suggesting the rationale for the equity purchase, was to then dump the credit portfolio assets onto someone else. The retailer credit portfolios have significant risk in when the macro cycle rolls over, its likely that CTC has been overly aggressive in credit issuance, and lately has been under reserving for the default risk ahead. The company sees the risk, and is trying to offload the receivables and reduce its overall risk profile before things get really bad. With an over earnings retail business, and a credit business with big cyclical risk CTC remains a short with downside to $100 vs current $145.
Purple (PRPL—Long Bias) | Reports Earnings Thursday After The Close. Data points are suggesting it’s still too early to be long of the mattress space over the near term. Mattress Firm visits are slowing, and online interest for “Purple Mattress” is slowing and remains negative YY. Last week TPX reported a topline growth slowdown 500bps while facing an easier compare and had to cut earnings guidance. Mattresses was the first category to crack from the pandemic boom, with the category rolling around late 2021. It should be one of the earlier ones to recover, though home turnover being near all-time lows certainly isn’t helping. PRPL’s balance sheet looks plenty solid to be able to wade through the consumer slowdown and make it to the eventual rebound. This is one of the “Bone, Bagger, or Bust” names that we think this can be a TAIL multi-bagger as the new CEO coming from New Balance knows how to properly tier product for different consumers within different points of distribution.
Warby Parker (WRBY—Long Bias) | Out on Wednesday -- a Potential Catalyst for Us To Get More Constructive on the Name. We added this name Long side-- pulling a complete 180 after nailing it on the short side from $45 -- about two weeks ago with the stock at $14. We're still working on the precise timing here on when to buy (which is when it will likely be a Best Idea). 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, it 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. We don't have a firm view on the print, but based on the TAIL earnings potential, would have no problem buying it higher.
