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.
Hibbett Sports (HIBB) | Shifting Higher on Short Bias List. We shifted this lower on our short list back in June in the mid-30s. Now sitting at 59, the stock rallied after the earnings report on Tuesday when sales and earnings came in better than expected. Visits rate of change looks to be bottoming, but we don’t expect to see any improvement in underlying demand, and the compares get harder in the coming months. As the ‘off mall Foot Locker’, the company has arguably been benefitting from the Nike pull backs at FL over recent quarters. We think Nike is going back to FL next year, and at the same time FL is trying to expand its own off mall presence, meaning HIBB could easily be a net loser in Nike allocations and share in 2024. The stock is optically cheap at around 7x EPS, but we think the consensus numbers are way off over a TAIL duration, as the street has HIBB EPS marching up to over 10 by the FY ending Jan 2026, while we’re closer to 5. And given the 75% Nike exposure that HIBB carries, we think a mid to high SD PE is actually the right level. Stock is worth somewhere in the mid-30s to mid-40s vs currently trading near 60. Another 5 to 10 upside in this name and it has Best Idea Short potential. 
GameStop (GME) | Moving From Best Idea Short to Short Bias List. The GME short has been working very well. We added this to the Best Ideas list in March around 23, and elevated around 24.50 into the 1Q print. Since then the stock has gotten cut in half to 12.20. Visits trends have been weak, but we think that trend perhaps will look less bad around the holiday selling period as last minute shoppers traffic the store to get games, toys, and collectibles. GME actually has one of the better looking SIGMAs in retail right now as well. The meme stock movement is mainly over, but there still remains some news risk over Ryan Cohen related buys or announcements here, which present potential opportunities to add to the short. Ultimately though, this stock is getting close to what we see as a fair value range of ~10, carrying ~3 per share in cash on the balance sheet. GME will remain on the Short bias list as we don’t think there will be a material change in the earnings cadence over the next 6 to 9 months and we think the stock can march down to the 10 level or lower over that time period. GME will report 3Q earnings Dec 6th after the close.
Foot Locker (FL -- Best Idea Long) | At 23, this print could go either way. But hold SOME and buy on weakness -- if it presents itself. Mind you, this is the quarter where Nike allocations trough, meaning max comp pressure. The Street already looking for down -10%. But could be 3-5 points in either direction. What we don't think we'll see is another colossal guide-down. Maybe tempering 4Q, but that's about it. When we upped this to a Best Idea Long two months ago at 16.50 (translation -- its been rock solid in a mixed retail tape), our call was that near term margin expectations were nearing the end of a bottoming process, and MORE IMPORTANTLY, there will be a MAJOR narrative shift between Nike and FL in 1H24. People are bearish on the name bc Nike pulled back, and both companies have the same tag line -- it's permanent. But we think that's completely ridiculous. We're certain that discussions are going on right now between top brass at FL and Nike, and the ratio of 50% Nike will take a dramatic turn back above 65% during 2024. There's no bigger comp driver for FL than increased high priced allocations. FL just struck a deal with the NBA -- which was entirely a sign to Nike that it's committed to basketball -- the sole category in question here. Once this narrative changes, which we're 90% confident it will, it will put FL into a sustained upcycle in comps to the tune of 10% or better, which puts 7-8% margins back in play vs the 1% it is putting up today. That gets to 7-8 in EPS power, while the Street is underwriting 2. Could the stock test 19 on a sloppy quarter? Of course. But we don't think it sees 16.50 again. We'd definitely be holding some here, and would buy more on a sell off on Wed if the trough quarter is worse than expectations. Even if we put a junk retail multiple on 7.50 in EPS, we get to a 3-bagger from here. The consensus won't know what hit 'em. They'll be upgrading the stock on a simple press release about a 'mended relationship' or the better tell, which will be insiders at FL buying stock. Best Idea Long.
Ulta Beauty (ULTA) | Reports Thursday Night. We saw some cracks in ULTA’s print last Q. Revenue slowed in the quarter, with implied 2H guidance of a continued declaration to only +6% for the back half. The company put up weakening GM in the second quarter, down 110bps from down 10bps in Q1. For this upcoming quarter the Street is estimating 4.97 in EPS, down 7% from last year and in line with management's guidance for a down quarter. Our bet is that the company beats, with decent traffic being offset by a big gross margin decline. But the magnitude of the EPS beats is getting less and less every quarter. We can’t forget that this quarter is the quarter the company is lapping the 5% price increases last year, which is now a headwind to growth and margins (100% flow through on price). Management guided to continued GM deleverage for the year from lower merch margins, higher inventory shrink, and supply chain costs. Ulta has been pushing a ton of promos lately in an attempt to compete with the Sephora sale a few weeks back, and now with Black Friday and Cyber Monday sales into the holiday season discounts are running wild. We expect merch margin to keep deleveraging as management works to maintain market share. We can see some of the increased traffic around the Sephora sale competition in the chart below. Management has said that maintaining market share is the goal at the end of the day. As we head into FY24 we expect merch margin and shrink to pressure margins, as well as increased labor costs. The consumer is going to be under even more pressure post this holiday spending season and the Kohl’s Sephoras that have opened up right on Ulta’s doorstep will be headwinds for at least 1H24. There’s nothing wrong with this company, it’s just over-earning and needs to be valued like a more mature retailer rather than a company early in its growth trajectory. While the stock is well off of the 550 peaks hit in April, we still think there’s downside here – well into the $300s. Best Idea Short.
Visits Trends for those reporting this week:
