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.
MercadoLibre (MELI) | Moving Down to Long Bias List. We went long MELI on July 4th, adding it to our Best Ideas Long list on September 24th, and its outperformed the XRT and market materially on both time frames. The crux of our call was that the TREND setup in MELI’s Latin American markets was much more bullish than the slowing consumer setup in the US, as the Macro Quad framework for MELI included Quads 2 and 1, bullish for growthy consumer discretionary names. That meant a likely acceleration in the P&L and upside to the earnings and multiple as the company gains share from its financially distressed competitor Americanas. Now as we head towards 1Q24, the outlook for Brazil and Mexico is pivoting to a less bullish Quad 3 (stagflation),while Argentina remains in Quad2--though aided by rapid inflation. At the same time, earnings estimates for 2023 have gone from 17.75 to 22.35, and 2024 has gone up over 30% from 25.00 to just over 33. 4Q is likely the last acceleration in top line to be reported, and we see about 10% upside to 2024 earnings still, but if the P&L slows the 49x PE multiple is unlikely to rise, meaning only 10% or so upside remaining. The stock is up 35% since we went long, and the risk reward doesn’t support being a Best Idea anymore… shifting down to lower half of our Long Bias list as the 4Q print is likely the last potential positive catalyst.
CarMax (KMX) | Shifting From Long Bias List to Short Bias List. When we did our Auto Retail Deep Dive on November 22nd, we added KMX to our Long Bias list as a long hedge to CVNA short in the Used Auto subsegment, given the opportunity for share gains. After continuing the work in the space, we think KMX’s near term risk around auto finance is too great to want to own, and the stock has rallied around 17% in less than a month on the recent rates move. Stock now trading at 21x PE, a hefty premium to other Auto Dealers. We see KMX as a long term share gainer as used prices reset, but there is a lot of earnings risk in the interim around bad debt risk in auto finance. Subprime auto lending hasn’t seen a persistent inflationary environment, and perhaps Fair Isaac has been a bit too fair in scoring the credit history of the last few years with all time high consumer credit quality just after a period of zero rates and low inflation. CLICK HERE to watch our Auto Dealer Black Book.
Carvana (CVNA) | Shifting a Few Notches Higher On Best Ideas Short List. On the rates move and short squeeze over the last week or two, CVNA has moved back into the 50s, right around where it was when we originally went short in September. We’ve heard from both bears and bulls. The bears don’t think the company can deliver on its promised scale at targeted profitability given the structure of the business and competitive risks. The bulls tend to believe the opportunity highlighted by management on 1mm cars at 3000 in EBITDA per car, with a concentration on fixed cost leverage within the reconditioning operation. We could argue that even if it gets there someday, given the likely extended duration to hit such a target (with inventory supply being the big barrier given competition), and the fair steady state multiple on a then mature business (probably 5-7x EBITDA), you still probably do not want to buy at this price. But that’s not the call we are making today. Rather we think that the company has big risk to earnings estimates over the next 12 to 18 months and rate of change risk over a TREND duration (3 or 4 quarters) while holding a 30x EBITDA multiple on the street NTM numbers. Online interest (below) doesn’t look to be getting better even as it hits easier compares. We think the company is being overly aggressive in price paid for used cars from customers, and we think as used pricing reverts lower in the coming months CVNA will face significant margin compression. Tack on the tough compares as it relates to overly high GP dollars from selling backlog of originated loans and once you pass 4Q you likely have slowing GP for the foreseeable future. Plus if this company wants to accelerate growth it will have to spend up in marketing to both acquire new customers and source incremental supply. That means the cost cutting story turns into a SG&A deleverage story again. Yes, the stock is heavily shorted, though short interest is making YTD lows down to ~35% from prior mid 60s earlier in the year. The balance sheet setup over a TAIL duration does not look good, and we think numbers are about to start going the wrong way.
Wayfair (W) | Shifting Higher On Best Ideas Short List. This stock has rallied, like other high short interest names of late, but we think the stock is headed lower from here given the setup over the coming quarters. The management team was out at a conference a couple weeks back talking down margins noting promos punching harder than full price. Meanwhile you have Etsy coming out with a restructuring of the Etsy marketplace and cutting headcount, an ugly read for forward demand and margins for the space. Etsy also has recently been highlighting the risk around rising ad costs as Temu invests heavily in ad dollars to gain share. As we look at the home retail space in aggregate, we see demand remaining under pressure with home turnover in a depression and consumer discretionary income under pressure. In the context of those facts, the 2024 expectation makes little sense to us, as the street is implying an acceleration to MSD topline growth, gross margin expansion, and SG&A leverage. We think maybe you can get one, margin improvement from cost cuts and holding margin vs competing for share, or reinvest for topline growth. Getting both at the same time given the macro and competitive environment will be very hard. Management is steering the focus to EBITDA, but that’s coming mainly via cost cuts, which isn’t supportive of topline growth. Not to mention that with the “450mm” in run rate EBITDA, the company is talking about nearly 700mm of that is from stock base comp while underpaying in salaries. So what is the multiple for that EBITDA when its not quite ‘real’ and its comes with no topline growth? We’d argue a multiple far below the current ~25x. Wayfair is a Best Idea Short with downside risk of 50%+.
Nike, Inc (NKE) | Long Into Gross Profit Acceleration in F2Q. We're Bullish, But Not Because of What Management is Spewing, They're Not Big On Telling The Truth. The Street is looking for -2% EPS growth this quarter (released on Thursday), and we think it'll be low by a country mile. We're modeling 0.98, or 16% earnings growth, driven largely by the gross margin line, which we expect to inflect positively this quarter. Nike ended last quarter with days inventory on hand down 14.7 days vs last year, and we think it has finally begun to stabilize its share loss in the North American running category. At the same time, we should see an acceleration in wholesale shipments (at higher gross margins) and the DTC shift should be more apparent in the P&L as it appears that the decline in China margins has found a floor. We know Nike is gaining share in China again, we just don't know precisely whether the market is up 5% or down 5% -- it's kind of a black hole over there. Nike is highly likely to reiterate that it's not going back to Foot Locker in scale, which we think is a massive obfuscation of the truth. We think Nike will go back to FL in size in CY2024 (weighted towards the back half -- but should begin in the Spring), and neither management team is prepared to admit it. We learn less and less with each Nike conference call, as the management team cherry picks anecdotes to fit its perennially bullish narrative, and leaves out much of what investors need to know to properly model the company across any duration. To that end, we think the Street will be materially off this quarter, particularly on the Gross Margin line, which we expect to be up 200bp vs last year and explains the full variance in our numbers vs the Consensus. To be clear, we liked Nike a lot more at 89 when it troughed on the last print than we do at 121, but we still think that TREND numbers will come out ahead, and over a TAIL duration there's 7 in EPS power, which is good for a 180 stock. Will that get you rich? Probably not. But for a big cap, liquid name where sentiment is still reasonably negative, we're net bullish on the set-up right now. We'd get more aggressive -- as we did last quarter -- if the guidance (which we never believe as Nike's internal forecast accuracy is horrendous) disappoints.
