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.
Gildan (GIL) | Materially Higher On Best Idea Long List. We went Long GIL in May, flipping it from the Short side to the Long side with the stock around $28. The GIL Long has been working well, and we think it’s one of the best stocks to own in consumer right now. The 3Q print confirmed many elements of our bull thesis. Growth accelerated in 3Q despite macro headwinds as the company is gaining share in the core US business, specifically highlighting the performance in fleece and ring spun (fashion basics). New Bangladesh capacity will fuel growth in international markets, driving further acceleration in the coming quarters. The company is also talking about the directional margin improvement as we are in the late innings of YY cotton inflation headwind. At the same time capacity coming online should be a gross margin drag, so the company is accelerating top line with margin trends likely getting better each quarter. Acceleration up and down the P&L is a recipe for multiple expansion. Numbers not moving much in 4Q, but 2024 expectations are likely 15% to 20% too low as the growth and margin performance become realized over the next 6 to 12months. The company highlighting share gains supports our view that in a challenged consumer/macro environment, share will tend to gravitate toward the low cost producer and best value proposition. That is Gildan. Additionally, the company accelerated its buyback this Q with $80mm in repo vs $75mm last Q in $62mm in 1Q. It’s buying back stock good chunks of stock ahead of the coming cash flow acceleration, meaning even better returns for shareholders to come. The rate of change and buyback capacity create downside support in period of greater market selloff. GIL is a Best Idea Long and one of the few names we think you can make money on across durations in US retail. Along with having the potential of being a 2 year double or better. GIL is one of the few names on our fundamental Long list that also has bullish signal strength in our CEO Keith McCullough’s quantitative market signal as. We’re incrementally bullish here.
Elevator Pitch CLICK HERE for PDF
Skechers (SKX) | Moving Higher On Best Idea Long List. This stock has been on fire since we added to our Best Idea Long List at $46 -- currently sitting at $49. We'll review SKX in our footwear deck this Wednesday CLICK HERE , but we still think it has material upside in white space, earnings and multiple from here. The reality is that almost every footwear brand is going higher in price point when the consumer is at its most challenged point this cycle. And everyone is leaving the $65-$75 prize zone that SKX now dominates. No longer the embarrassing shoes to wear that it once was, it's also benefitting from a trade down effect as consumers become more budget conscious. The company has been executing flawlessly in its core 'knock off' business model, while making surprising strides in the performance market. A dangerous competitive set there, but with no meaningful competition its price point. We build to over $7 in EPS over a TAIL duration vs $3.50 today, which is good for a stock over $100. As we said when we first made this a Best Idea several months ago, it reminds us of DECK 2-3 years ago -- but with more long-term runway in the core and a more sustainable competitive advantage.
Vista Outdoors (VSTO) | Off Our Short List on Take-Out. We originally went short this name back in April of 2022 at $36.22 and upped to a Best Idea Short in June of 2022 at $37, the stock is now at $28. We went short this name due to the all-time high handgun purchases and ammo stockpiling during the pandemic, driving outsized margins and consensus straight-lining, at the time, $7 in EPS in perpetuity even though prior peak earnings were $2.50. We were modeling a big 10% drop in ammunition sales which brought margins sub-10%. The company was also in an acquisition spree, buying brands in golf, apparel, biking and outdoor cooking when they were all overconsuming. About 60% of revenue comes from ammunition sales (the Sporting Products segment) that there is a potential deal to sell it to the Czechoslovak Group for $1.91bn. Last week Colt CZ offered to buy the entire company for $30 per share but that offer was turned down. With the potential for a special situation, we'll take the modest gain on this short and leave it from here to the risk/arb community.
Revolve (RVLV) | Moving To Short Bias List From Best Idea Short List. We initially shorted this at $66.22 on 12/05/2021. Now the stock is trading at $14.42. We were right for the right reasons, as this company is quickly running out of TAM, seeing weakness in its high-end FWRD division, and is hurting from an extremely elevated return rate of 57%. The company saw weakness on nearly every expense line with updated guidance of continued pressure. Inventory is still elevated with work to be done to bring it back to more inline with sales growth. The last seven quarters the return rate has been 55%+, which is an unsustainably high level of returns. The company used to average around 50%, so when returns go back to a more normalized level gross margins will see that incremental benefit. We’re not saying that is going to happen in the next quarter or two, but it could happen in 2H24. We still see downside here but we are in the ninth inning of this call, and given the weakness in the prints lately and the stock moves, we are backing off materially. It's time to declare the win.
Wolverine Worldwide (WWW) | Punting WWW Long. The reality is we got the timing on this name wrong. We still think its a POD 3 story, but as we said all along, POD 3 stories (that start on the balance sheet and then work their way to acceleration in POD 1 and POD 2 on the P&L) take notoriously long to play out. Is the stock washed out? Probably. But we can't point to a near-term catalyst to get it higher. It's kind of like a mini -- but more progressive and defendable version of VFC, which we're short. Brands lack heat, and company has a leverage problem. WWW is selling assets to fix the problem. And we think if you have a super long duration, you make money on WWW down here at $9. But in a recession there's also no reason why this stock can't see $5. And we're not going to be patient and take our lumps if that day comes. Better names to be long here. In the meantime, short VFC.
Victoria’s Secret (VSCO) | Adding Back to Short Bias List. We’re re-adding VSCO to the short side. We initially went short at $45.78 back in November 2022, the call has played out faster than expected and we took it off our short list with the stock back around $19 in mid-summer. Over that time period VSCO EPS for this year went from $7 to $2.40, and the company just guided to ~$2.00 for the year with just 4Q left. Near term compares are easy, so maybe gets some more multiple support. Though it also loses help from Adore Me’s inorganic contribution starting at the end of the month. Still, we think this company has a big problem as it relates to brand relevance and competition. It’s trying to pivot back from its “sexy” roots, after the pivot to being less of the old angels aesthetic and being more inclusive didn’t help drive growth. Though we’re not sure the ‘image’ is the real problem here, rather than the company becoming too reliant on a promo/sale marketing model to drive traffic after underinvestment and facing stiffening competition from Aerie, the athleisure brands, and smaller startup brands. Near term business trends are being buoyed by beauty performance, a category we think is poised to slow over the next year. Longer term we think margins will be stuck in the 4-5% with the brand struggling to grow. TAIL earnings of around $1.75 to $2.25 and a stock probably worth around the mid to high teens. Stock now at a peak post spin P/E of 12x and it currently carries high short interest (deservedly so) at 17.4% as of late update from FactSet, but perhaps that is lower after the near term squeeze on this latest print.
Birkenstock (BIRK) | New Best Idea Short . We can't call this Brokenstock anymore -- at least not yet. As its just had a tear back above it's IPO price. We went through a detailed analysis of the brand and financials in our recent Black Book (For the link to our Birkenstock IPO Black Book CLICK HERE). Ultimately we think this stock is worth $30, and it's now clocking in at $48. The Google trends show that this was a hot seller over this Black Friday, which is the primary reason for the rip, but sets up a very difficult comp for next year. There's nothing wrong with this brand -- it's been around for 250 years and will outlive the next fashion cycle. But 'cycle' is the operative word there. This brand will ebb and flow, and right now it's flowing. That's exactly when you want to be short a name that at best deserves an 8x EBITDA multiple and is currently trading at 19x. Will the next earnings report be good? Sure. But the top line, margin and multiple trajectory are utterly unsustainable. At some point this will geta 6x Ugg multiple. Catterton and the bankers got greedy on this one. Now that its trading back above to IPO price, it's time to play whack-a-mole. We wouldn't cover this stock until it hits $30, and wouldn't buy until it hit the low $20s, which is entirely possible as it tries to comp a simply massive comp in 2024.
RH (RH) | Expect Very Bullish Headline Print After the Close on Thursday. Remember that last quarter was the first time management did not guide down the year in seven quarters. But it took down 3Q to an operating margin of 8-10%. That's a joke. We don't think this company has any intention of printing a margin that low. Will it 'push' marketing costs into 4Q to keep expectations low -- probably. But the reality is that for this year we think that RH comes in close to $13.50 vs the Street at $9.90 and that's with only two reported quarters left to go. The roll out of Europe was a pail/fail, and based on our reads, it was a pass -- likely to contribute ~$150mm in year 1. We think RH is on track to put up better than $20 per share in 2024, vs the Street at $14. That comes from Europe, the product refresh (the first in 8 years), the roll out of Contemporary from the Coasts to the middle of the country, continued square footage growth, and a refreshed modern line. We think that Munich and Dusseldorf are on track to open this month, and we're seeing abnormally low levels of 'slippage' in RH Gallery openings right now (which is always a risk). We think the company will stress that Paris and London are on track. Simply put, this company is firing on all cylinders right now from an execution standpoint. Yes, the sell off last quarter on the guide was painful, but RH is gonna beat that. The bear case is that this is a levered company with variable rate debt that just bought back 17% of the float at $326. In 12-months-time, when RH is earning over $20 per share -- on its way to $60 -- we think the Street will be upgrading this name at $500 -- making management look like geniuses for buying back stock when it did. If our TAIl estimates are right, which we obviously think they are, this is a $1,500 stock. I know we're a broken record on that one. But this is a volatile story, and you have to stay the course on the underlying research. We certainly are. Best Idea Long.
Lovesac (LOVE) | Moving Higher On Best Ideas Short List. LOVE reports 3Q this week (Wednesday before the open), though given its accounting issues, LOVE reported 2Q late, and guided 3Q already when the quarter was over, so the 3Q number should be inline or better than the street number. 4Q outlook would be the notable datapoint, and so far in visits and online interest (below) the trend looks to be slowing in the quarter, with total revenue for the street expected to slow to +11% from +14% in 3Q. And that’s with store counts up 21% YY in 4Q. We think there is risk to the company meeting 2024 and 2025 expectations, even as 2024 revenue in just a couple months reset from $828mm to $777mm. This is a single product company (sactionals) exposed to the depressed home turnover environment. It is investing to grow, with very weak output on the revenue and incremental margin flow, meaning despite the best furniture selling environment of a generation during the pandemic, the company is not generating free cash flow. LOVE layered on ~$135mm in implied debt from leases, carrying a 7.4 year weighted average lease duration. That seems like a lot of operational risk/inflexibility for a single product company with cyclical risk into a home retail recession. We’re building to TAIL earnings power of around $1.00 to $1.50… while the street is building to $4+ including EBIT margins building into the teens. We think those expectations are ridiculous. We took LOVE lower on our short list when it broke below $20. We think the stock is worth around mid to high teens, and got down near $14 in October. Now the stock has rallied back to ~$22. Getting incrementally bearish here on that move up.
Lululemon (LULU) | Reporting Thursday Afternoon. We took this off our short bias list back in August at $366 ahead of its Q2 print due to a change in consensus and how the company was performing. For the upcoming quarter, consensus is toward the high end of guidance for revenue growth and gross margin improvement. Revenue is expected to be roughly stable on a rate of change basis to last Q at +18%, with gross margins slightly weaker at +180bps vs +230bps last Q, with EPS growth for $2.28. Traffic trends lately have been improving. We think the company will be reach the top end of its guidance, if not have an even better print. LULU is a quality company, and our TAIL EPS power is ~$3ps ahead of consensus -- we’d be surprised if we weren’t long this name within the next 12 months.
Savers Value Village (SVV) | Moving Higher on the Short Bias List. We first added SVV to our Short Bias list in mid-October at ~$15.5 Our thesis was simple… the street believes the long-term bull case on SVV, which is based on expansive unit growth and perpetually sustainable MSD comps, while we think comps can continue to slow materially. Also, SVV significantly benefitted from a change in supply dynamics, as it saw “On-Site Deliveries” (which cost 1/3rd as much as “Delivered Supply”) grow from 53% of total supply in 2019 to 75% of total supply in 2020—resulting in gross margins exploding from 51% to 58%. We believe “OSDs” as a % of supply will settle lower as the business continues to normalize, which leaves room for major margin compression with comps continuing to slow. The short was working well as the stock crashed ~20% on the last earnings report as comps slowed and management tempered the guide, but it has since rallied ~25% back to $15 after management blamed the slowdown on warmer than expected weather paired with incorrect product assortment on the floor. Well, our thesis has not changed, so we are taking the opportunity to move the stock higher on the Short Bias list given its increased valuation. Beyond our two key thesis points above, topline rate of change is slowing from +30% a year ago to up MSD, the balance sheet is levered while the company is operating a capital-intensive growth plan, and it’s still trading around ~10X EBITDA. SVV will also face major near-term selling pressure as Ares Management (which took SVV public) still owns 86% of the shares outstanding, is sitting on an estimated ~3X gain, and will be able to start selling stock on December 26, 2023 once the lock-up period ends. While we would love to be long this name when rate of change bottoms, gross margins settle out, and selling pressures subside, the near-term trend is still directionally bearish and short-term risk far outweighs the potential reward. Given the near-term leverage, margin and PE overhang concerns, there's no reason why this name can't trade as low as 5x EBITDA… A 5x EBITDA multiple suggests a $5 stock.
