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. Video Link CLICK HERE.
RH | What Gives? McGough, who enjoys writing in the third person, hates one thing above all else...being wrong on a model AND a stock simultaneously -- especially for a high-profile name like RH where he's biggest bull on the Street by a country mile. That happened with RH on the print Thursday night. See our full note HERE for our take on the name/event. But anytime we're wrong -- on anything -- we need to shake the Etch-a-Sketch clean and re-evaluate every single element of our thesis. What did we get wrong? What is the market not seeing that our research does? What is the upside/downside risk and where's the pain trade from here. We'll be doing a deep dive Black Book on RH (Bonus Content) on Wednesday December 20th and will flesh through every aspect of the model across a TRADE, TREND and TAIL duration. The punchline is that I still think that the Street will be upgrading this stock closer to 500 over 12-18 months. We'll quantify precisely why, and will build a revenue and margin bridge over time as roadmap as to how to make money on this name long-side.
Decker's Outdoor (DECK) | Moving higher on Best Idea Short List. We think that the running space is going to be a massive battleground in 2024. HOKA and ONON should be at the center of that. DECK is trading at peakier than peak valuations anyway you cut it, and valuation matters when growth and gross profit dollars are likely to decelerate sharply. We think more competition is coming at HOKA, but are increasingly concerned about promotional levels at ONON. Either way, it's bad for DECK's stock price. We went long this stock at 250, and now its pushing 700. In 12-months time we wouldn't be surprised to see this name trading with a 4-handle. For our Black Book on the running space, click link HERE.
Macy's (M Short Bias) | Punting from short list. Though the buyout announced tonight is hardly a massive premium from where the stock closed on Friday -- 21% above -- and the M Board is 'mulling it over' the simple existence of a bid shows that there's value here. Of the 5.8bn buyout bid, we could potentially ascribe $3bn alone to the value of the Herald Square store. One thing we always appreciated about Macy's, unlike KSS and JWN, is that it KNOWS its in a terrible perma-share-losing space. And it manages its business for the reality it lives in. If you're expecting earnings upside from Macy's this quarter, don't get your hopes up -- though management might manufacture upside to ward off the bidders or get a heftier premium. Either way, the risk reward on being short Monday's rip in this name is not good. What we would do is press JWN, where we don't think it has the same take-out optionality. KSS is even lower on this list, and we think it is having a terrible quarter, with credit risk to boot. If the stock spikes on a big group trade tomorrow, we'd step on that short side (no position right now).
Sally Beauty Holdings (SBH). Taking higher on Best Idea Short list. Beauty has run big over the past few months, and SBH is up 30%, despite missing the quarter and tempering guidance. While the company has been optimizing store base and consolidating distribution operations, EBIT leverage has also come from a lower advertising spend—i.e. the company is cutting back investments in its brands. We LOVE shorting stocks that cut back on marketing and merchandising/R&D to keep margins high. This company is egregiously overstored, has a questionable consumer value proposition, and is at the butt-end of an eroding supply/demand imbalance we see emerging in beauty in FY24. We think this P&L is a melting ice cube, and will drift down to 5% margins vs the 9.4% level we see today. Yes, it looks cheap, but valuation is irrelevant when people are underwriting the wrong earnings power. We think earnings are headed to 1.00ps vs the Street underwriting 2. if we're right, this deserves a 5x p/e at best. That's 50% downside over a TAIL duration...perhaps on its way to a zero. There's a non-zero chance that this company goes the way of Payless and RadioShack. We're getting heavier on this name.
Ulta Beauty (ULTA) | Moving higher on Best Idea Short list. The stock had an outsized 24% move since reporting a headline beat, but an abysmal earnings algorithm (including down EPS yy). This company falls into the bucket of 'defend market share at all costs' which is an outright reckless strategy with the Beauty category slowing, an existential threat becoming a factor NOW with all 1,150 Sephora (LVMH) shops built out and rebranded in KSS stores, and the supply/demand balance in beauty going the wrong way. We think ULTA was too optimistic with its guidance in 4Q. Yes, it's helped by the 53rd week. But hitting this quarter is not the slam dunk that we usually see for ULTA. For our latest note and Elevator Pitch on the name, click HERE.
Wayfair, Etsy, and Beyond (W, ETSY and BYON). We see Short W as the trade in Home Ecommerce at the moment. Wayfair sounded pretty bearish at MS Conf. On the Wayfair 3Q call in early November the words "recession" or "recessionary" were mentioned 2 times. This week at the Morgan Stanley conf the words were mentioned 20 times. Management seems to be talking down margins in a big way noting "Consumers are acting exactly as they do in a recession period in terms of leaning in on promotions, looking for that value story." Promos/sale punching harder than full price was the message. Some sales updates and credit card data suggest that BYON is winning around Black Friday, appearing to gain share around that sales event. That means competitive intensity rising. BYON was explicit around its margin headwind from discounting as it tried to convert Bed Bath prospects into new customers. We think that means gross margins across the home ecom landscape will see pressure. Then we couple that with ad costs rising, as ETSY detailed how as Temu aggressively invests in marketing dollars to gain share. Data from our Hedgeye Communications team led by Andrew Freedman supports that cost headwind in the online ad market being catalyzed by Temu. We think the margin outlook for 4Q in this space is bearish. We remain Long AMZN in ecom, but think the only trade to make in online pure play names at the moment is Short Wayfair, as W is a Best Idea Short.
Signet (SIG) | Shifting Higher On the Short Bias List. We shifted this lower on our short bias list in March with the stock in the low 70s. Our earnings outlook hasn’t changed TAIL earnings are 8 to 9, we think a fair multiple here is around high single digit (7 to 9x). That puts a fair value on the stock around mid-60s to mid-70s. A key element to the bull case here remains the cash balances, which by year end will arguably be about 20/share. And the company does keep putting some of that cash towards buyback, with $128mm repurchases so far this year. That definitely mattered a lot when the stock hit the 50s, it matters less so up here above 97. Visit trends continue to look wear (below), the 53rd week helps here in 4Q, but we think we see a slowdown into early 2024 as the consumer continues to curb discretionary spending. Jewelry PCE remains 35% to 40% ahead of 2019 levels, and we think SIG’s competitive positioning means risks of share loss. Afterall the growth levels are not good here with comps down 12% in 3Q, EBIT down 59% weakening from -47% last Q. SIG going up the Short Bias list now with 20% to 30% downside risk.
Designer Brands (DBI) | Taking Off Our Long Bias List. Whenever we add a name to our idea list, it starts on the Bias List while we do the deeper dive into the underlying research. We went long this name about two months ago at 8.46. It went up to nearly 13 this week and crashed on the print to right about where we went long. The company drastically took down EPS guidance for the year and took revenue guidance to the low end of the prior range, so down HSD. While we still believe in part of our original thesis about the comp boost it’ll get from Nike coming back, the next few quarters look uninspiring on the margin side. The company is willing to promote to maintain market share and while margin comps aren’t that tough margins are still at 500bps above pre-pandemic levels and could easily fall from where they are. To be clear, we HATE when we see companies promote to defend market share. Not a story we want to backstop. We're punting it. For now, the levered play on Nike remains Best Idea Long FL, which we went long at 16.50 -- and we think we'll have a difficult call to make when it hits 50 (now at 28).
Crocs (CROX) | Elevating on Best Idea Short List. This stock has rallied from the high $70s to 103 since an uninspiring guide, with the Street thinking that 'the worst is over'. We beg to differ. We were asked by a client this past week what would make us get more constructive on CROX, and our answer was 'if it put up a teens EBIT margin next year'. There's simply no reason why a footwear brand -- even one as easy to manufacture as CROX should be putting up a 27% EBIT margin. We already know that Hey Dude was a bust. 2.4bn in capital -- poof -- the company showed that it can't develop and grow a more complex footwear model than a simple Crocs shoe -- which requires minimal labor and R&D. The Street gets that though, and we don't think there's anything in the stock today for a Hey Dude recovery. We'll likely see a large write off/impairment of that in the component of the model in short order. The biggest pushback we get on CROX is that its 'cheap at 9x earnings', and the company has a lot of international growth ahead of it. But that growth won't come at premium US price points. And let's not ignore the fact that this name traded not too long ago at 4.2x EPS. No reason why it can't get there again if growth continues to slow.
