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.
Deckers Outdoor (DECK) | Flipping from Long to Short. We added this name just over a year ago to our Best Idea Short list at 255, calling for a double in the stock. Today it's at 632. We spot checked our multi-year sum-of-parts model at the time of our Best Idea call, and we called for a fair value of 600-700 over 3-4 years. We got that in just 15 months. Earnings have come in way ahead of consensus, but inline with our model, and the consensus is rapidly catching up to our estimates -- despite the company's best efforts to keep expectations low. Yeah, we could tweak our multiples higher in our SOP model -- but that's called 'deviating from the process' and we don't do that. So that explains why we're no longer Long DECK. So why Short? First off, it's moving to our Short Bias list -- not a high conviction call like we have with ONON -- though DECK could move to a Best Idea Short if the latest trends continue, and the running competitive landscape intensifies meaningfully in 2024, which we fully expect. One thing that tweaked us in the latest quarter is that the upside came from Ugg, not HOKA. Golf clap to DECK management there (we've repeatedly said they're second only to Nike as being the best brand managers in the business). But the reality is that no one will ever pay for Ugg in DECK's valuation. It's worth maybe 5-6x EBITDA as a cash cow annuity, and the combined entity is trading at an all time peak 18x EBITDA and 3.6x EV/Sales (the latter is even more stunning to us). Valuation is not a catalyst, but the reality is HOKA is slowing on the margin. Is it coming off a big growth base, yes. It's still putting up better numbers than 98% of retail. But we think that Nike is going to attack the running category with a vengeance in 2024 -- likely with a major platform launch around April/May ahead of the Olympics. Nike has spent several hundred million on this launch (and has kept it quiet) and will disrupt the running space next year. We're not saying that Nike succeeds, but simply that it will be disruptive. Someone's going to lose share, and most brands are likely to step up discounting due to excess product in the channel. We think that this will be most damaging for ONON (Best Idea Short) -- and the 'dummy math' is to slap a ONON multiple on HOKA and give Ugg its' 5-6x EBITDA multiple. What happens if ONON loses half its market cap in a single day when sales slow, margins crack, inventories bloat, and the company lowers guidance? Yes, we think that will happen, which poses risk for DECK. Simply put, at 632, too much can go wrong and not enough can go right. We remain SLIGHTLY ahead of the consensus for the year (we were 30% ahead before the Street caught up), but that won't be enough to generate outsized Alpha on the upside with DECK. At a minimum, if you own it, we'd be sellers. If you believe our thesis about an intensified running ecosystem in 2024, we'd initiate a short position in DECK here.
Camping World Holdings (CWH) | Making a BIG Jump to Top of Our Long Bias List. This stock has been cut in half from 32 in the July FOMO, to about 18 today. This is a massively volatile stock, and we get why. Demand is near the bottom of the troughing process (bottoms are processes, not points), and this is the kind of name -- a company that is consolidating the industry in a downturn by buying dealerships at the value of inventory on the books -- when in effect, it will emerge from this cycle with no competition of scale. There's really no other companies we can point to that have such a wide competitive moat as CWH does in RVs. This stock could triple from here from once the cycle shows any inkling of being at the end of a bottoming process -- that's how much torque there is in this name. But what really gets you paid isn't the multiple -- but the earnings power this company will have in a recovery. The Street is underwriting ~2.00 in EPS in FY25 -- though the way we see it, it could be closer to 8. Even if you put a 10x multiple on that -- it's currently trading at 14x -- you get to nearly a 4-bagger. Is there downside from here? Yes, there's a downside case to EVERYTHING. But we think a trough price is around 12/13. So you're taking 5-6 downside and over 60 upside. Tough to find a risk/reward like that. This one is moving to the top of our Long Bias List -- a big jump. We'll wait on making it a Best Idea, as we want to get closer to the cycle inflection. Though admittedly we risk doing so at a higher price. We're OK with that. But if you have a 2-3-year time horizon, we'd own a toe-hold position in CWH here today.
The Gap, Inc (GPS) | Moving Higher Short Side. The Street has a love affair with this company right now. The stock is at 13.50 -- up 35% since the new CEO announcement. We've seen upgrades, plenty of 18-20 price targets, and we simply can't get there. People are talking about cost cutting opportunities at GPS, which we call foul on. A series of CEOs has been cutting costs out of this model for the past 20 years. It's time to invest in growth, in product, in marketing, in consumer experience, in digital. Cutting costs here is a colossal mistake. The company is on track to earn about 0.70 this year, with Street underwriting 1.00 over a TAIL duration. But one theme we've been highlighting is we're at the very start of a period where brick and mortar (the lion's share of GPS' business) will lose share aggressively to ecomm -- where GPS is underdeveloped. If we see the company beat earnings due to cost cuts, this will directly borrow (if not steal) from the earnings power in the outer years, which puts 0.50 in EPS in play. This name trades at 16x earnings and 10x EBITDA -- both are too high for GPS by 50%. We'd short some today, and will almost certainly make it a Best Idea Short if the stock rallies around cost cuts. Over a TAIL duration, there's no reason why this can't be a 6-8 stock.
UnderArmour (UAA) | Moving Higher Short Side -- Management Is Doing All The Wrong Things. Last week's UAA print was good for a mini rally, as the company put up a slight EPS beat, but on weaker revenue with higher margins. Its sounds like the new CEO (Stephanie Linnartz) just doesn't get it. Similar to Gap, this company is just coming off a 5-year tenure of a cost-cutting CEO. And it has to make up for the sins of the past in a BIG way. So when the company talks about taking up the R&D and Marketing budget -- we think its talking about 10-20%. The reality is that you can manage a business like this for margin. But that'll get you the troughiest of trough multiples -- and 13x pe and 8x EBITDA isn't close. In order to be investable again, we think UAA has to DOUBLE its R&D and Marketing budgets. Gotta think big here, because competitors are thinking bigger -- Nike is, Lulu is, Rhone is, Vuori is, and even Skims is -- it took a major shot across UAA's bow by endorsing world class athletes for compression underwear just two weeks ago. The only stocks that work in this space are those where the top line is accelerating and GROSS margins are on the upswing. That's not where UAA has headed. Remember when LULU hit a buck back in 2007? Sentiment can change on these names fast -- especially while competition accelerates into a recession. UAA now sits near the top of our Short Bias List, and we'll likely make it a Best Idea of cost cuts take it above 10. This should be a sub-5 stock.
Home Depot (HD) | Reports Earnings Tuesday Before The Open. We’re Bearish HD into the print. The market likely understands the risk around 3Q and 4Q given visits trends were weak in 3Q and with FND a couple weeks back making it clear there is risk to demand trends in home improvement right now. However we think the market continues to underestimate how weak comp trends can be and for how long they can persist in the home improvement space. Even after the FND demand warning the consensus has HD comps as positive in 2024. The continued pressure on housing turnover, the drastic difference in affordability (change in mortgage payments), and general pressure on the consumer wallet means we could see demand trends continue to weaken into mid 2024. Harvard’s Joint Center for Housing Studies recently released an updated look at the indicator of Remodel activity (below), which suggested demand to continue to slow into 3Q2024. Our research and models indicate a similar risk over the coming 12 months. We think HD has earnings risk to ~13 on our base case and stock downside to 200 vs current 290.
For the replay of our call on the home improvement demand risk and scenario analysis, see our Home Improvement Deep Dive Video Replay and Slide Deck Link CLICK HERE
LOW Not Reporting This Week. It’s perhaps notable that LOW isn’t reporting this week, despite the fact that historically this is the week it reports. It will be reporting on Tuesday of Thanksgiving week instead. LOW is our favorite short in the home improvement space.
Target (TGT) | Reports Earnings Wednesday Before The Open. We don’t have a call currently on TGT, this was a Best Idea Short earlier in the year, but we took if off our short list after the rapid stock fall in late spring to early summer and the 2Q report. The stock has continued to march lower with the greater consumer slowdown. The “boycott” impact looks to have waned as of mid-July, with TGT traffic (below) performing better vs a subset of big box off mall retail. The visits trends are still not good though trending mid to high single digits in the last couple months. Also important to note that the CEO was on TV at the end of the quarter saying the consumer is buying less stuff, trimming spend on goods, and even pulling back in grocery. So sounds like there shouldn’t be any improvement expected in the demand trends at TGT into 4Q, street is currently expecting comps down MSD each in 3Q and 4Q. Commentary this Q will be an important read on the direction of the US consumer. The TGT setup is interesting as we are still bearish on the US consumer outlook, but the compares will get much easier here next spring and earnings expectations have already been reset lower several times.
Sally Beauty (SBH) | Best Idea Short Reporting Tuesday. We upped this to a Best Idea in June at 12 after the Q3 print (stock now at 8.32 -- down 31% in 5-months). Last quarter the company put up EPS in line with consensus at 0.49 and a revenue miss of $931mm vs the Street at 945.4mm. Revenue decelerated to down 3% from up 1%, and the company guided full-year to down LSD, implying Q4 down around 3%. EPS YY decline for Q4 is expected to sequentially improve for the fourth consecutive quarter, consensus expecting -9% from -11% last Q -- though traffic visits below are suggesting much worse. On a gross margin basis the company guided to the year ending roughly in line with prior years, at about 50%. The Street is at 50.4% for the quarter, implying a 225bps improvement from last year, which would be a sequential improvement from Q3 flat to last year. The company is guiding to store count down 6-7% for the year. Visits for all Sally stores have been on a decline over the last few weeks, while making lower highs and lower lows for the last 5 months. SBH is a net share loser in the beauty space, with volatile sales over the last few years. Since adding as a Best Idea Short the company is now trading sub-10, at a 4.3x PE multiple and 5.5x EBITDA multiple, both of which were at 6x and 6.3x when we added. This stock still has a higher EBITDA multiple than it does PE multiple, which is something we are always wary of in Retail. No reason both earnings and the EBITDA multiple can't go lower. Knowing what we know today, we'd cover below 5 -- perhaps meaningfully so.
WalMart (WMT) | Daniel Biolsi on our Staples Team covers WMT for us (it's basically a grocer). Given that it's a retail bellwether, I pinged him for his comments. Here are his thoughts...
"I’m expecting margin driven EPS upside in Q3. WMT US SSS are expected to decelerate further in Q3, but would still be above the long-term formula due to strength in grocery and e-commerce. Grocery SSS have likely decelerated to +MSD%. A HSD% increase (flat sequentially) would represent an outlier in the grocery sector in Q3. The traffic data shows deceleration each month in Q3. Gross margins in Q3 are still benefiting from the comparisons to markdowns last year and will be the primary lift this quarter. Management will want to highlight the challenges facing the consumer while reminding investors about their competitive advantages and low-priced offerings for consumers to save."
Biolsi and Howard Penney do a bang-up job tag-teaming the Consumables space. Ping for their research.
