We’re hosting our weekly “The Retail Show” tomorrow, Wednesday 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.
Making Major Changes Long Side and Short Side To Our Highest Conviction Ideas
LONGS
- Gildan (GIL) | Moving up to #2 on our list, behind RH. We think that only good can come from the activism we've seen step up in the two weeks since Chamandy was fired as CEO. To be clear, we don't care who runs this company, though after nearly 30-years at the helm, and an uninspiring long term shareholder return vs the S&P and XRT, it's surprising that so many holders are demanding his reinstatement. If he remains out, then there's a change agent in place that potentially sets up the company for a sale. If Glenn comes back into the hotseat, he'll have to cooperate with the Board instead of running it like its his company. He may have co-founded it, but he diluted himself with stock sales over the years and now barely owns enough to be in the top 10 holders. Juxtapose that against Gary Friedman at RH, who is 'all in' with 25% of the company's stock under direct ownership. Regardless, we think that the TREND and TAIL top line and margin setup here is far better than the consensus is modeling, with the Bangladesh facility as an accretive kick-off to meaningful international share gain in fashion basics, at a time when we think GIL is winning in North America as the consumer trades down to the low-cost producer for screen-printed product. The stock has been acting relatively well, with the stock at 33 vs our call at ~27. But we think this name could set up to be a 2-year double from here.
- Nike (NKE) | Moving up to #3 on Our Best Idea Long List after de-risking CY24 on last week's print. Massive P&L inflection in 2024. See our full note HERE.
- Foot Locker (FL) | Pseudo Victory Lap, But Stock Could Still Double From Here. With the stock at 16.50, we raised this to our Best Idea Long List -- above Nike (for the first time ever). We got that one right for the right reasons, and the stock is now sitting 88% higher after just 3 months. But we still think the real catalyst is on the come, and -- despite what management is telling you -- we are likely to see Nike come back to FL IN SIZE sometime in CY2024. FL's 'Nike Ratio' currently sits at just 50%, and we see it pushing 70% within 18 months. Both companies say nothing about this -- which is why we get so much pushback. But they're both lying via omitting the truth -- that they're having discussions today about FL getting exclusive Nike product to a far greater degree than you see today. That puts FL into a sustained upcycle in comps and we get to 7-8 in EPS power given massive operating leverage, and a stock roughly double where it is today. Today, the stock has an average Old Wall target of 24 -- with the Stock at 31 -- and more sells/fewer buys than it ever has. We think -- with a high degree of certainty -- that we'll be going through an upgrade cycle with the stock in the $40s. Maybe that's when we lighten up on where it sits on our list. For now, we like this name, and like being massively outside of consensus from both a modeling and a research perspective.
SHORTS
The day has come...HELE, which we think will be cut by 70% over a TAIL duration, is being dethroned by ONON and DECK on our Position Monitor. TAIL downside might be greater at HELE, but we think you get paid sooner being short ONON and DECK, which not covet the #1 and #2 slots on our Position Monitor. For full details on our thesis, see our BlackBook HERE.
- On Holdings (ONON) | We think ONON's 'day of reckoning' is coming sooner than later. We literally think that this stock, which we're not even convinced represents a real brand yet (as outlined in our Deck), will lose 50% of its value in one tick. That is likely to come sometime in 2024, likely sooner than later. The discounting -- from the company, then immediately following at key retail partners, and then via Alibaba who likely secured inventory overages from the ONON factories, and then blatant knock off/fake product poses a real Gross Margin, Inventory Bloat, SG&A spike, and top line slowdown risk for this company. Mind you, these might be 'good guys' (we hear this from everybody) who are very believable, but the reality is that they've never managed through a product cycle, or an economic cycle -- and the brand appears to be facing the butt end of each of those headed into 2024. It's 20x EBITDA multiple could see 10x in a heartbeat if we're right and the gross margins begin to crack -- and/or the inventory bloats in the coming 1-2 quarters. We won't cover this until it becomes a 15 stock, and won't go long until it's closer to 10 based on what we know today.
- Deckers Outdoor (DECK) | It's a coin flip as to which we like better short side, ONON or DECK. We think that ONON has greater event-risk around earnings, as the P&L is run much more aggressively than DECK management (far superior) is running the model. But the second ONON cracks, DECK will be down over 20% as it loses massive multiple support. On top of that, we're seeing unprecedented supply growth coming into the market in 2024, and the supply is more targeted at HOKA/DECK than ONON. It's not just Nike, which will buy shelf space as it re-enters wholesale by way of offering exclusive SKUs and colorways, but also from the likes of Adidas (which is likely to lose), Asics, Saucony, New Balance (which is hot in its own right), and Brooks. All are going right after HOKA's jugular -- the ultra cushioning runner. Let's be clear about something...I have no idea who wins this game. Quite frankly I don't care. All I know is that the capital that is being deployed by all these brands -- especially Nike -- in an Olympic year -- will be massively disruptive. If anything, you can argue that the winners will be the retailers -- FL and JD Sports in particular. Maybe DKS and ASO -- though footwear is only 25% of their respective offering. When brands compete on product, the ones with the best balance sheet, biggest innovation push, and biggest endorsement kitty (NKE has ~$10bn -- as much as the rest of the industry combined) tend to win. A month ago, we'd have said that we like ONON short more. And to be transparent, we were long DECK from 250 to 650. But now we think DECK in particular is over-loved and over-owned by the buy side and sell side alike. Keep in mind that the upside in the latest quarter came from UGG, which is a 5x EBITDA business. HOKA is being valued at 20-25x. Don't you want the upside to come from the growth business instead of the cash cow annuity? We're highly likely to see a quarter in 2024 where gross profit dollars at HOKA decelerate from 30% to something closer to 5-10%, which like ONON, could cut this multiple in half and prompt a downward earnings revision cycle.
Tractor Supply (TSCO) | Moving Higher on Short Bias List. We added TSCO to our Short Bias list back before our October Home Improvement Deep Dive as we expected TSCO to fall short of comp expectations over the upcoming 12 to 18 months. The company subsequently missed comps for 3Q and took down full year revenue. The stock has since rallied despite trends still looking to present comp risk going into 2024. Visits trends per Placer do not appear to be improving, looking weaker in the most recent couple weeks of data at both Tractor and PetSense. Meanwhile we think the depression in home turnover will mean persistent pressure on big ticket home spend typically seen for 1 to 2 years after a home purchase. That means risk to the hardware, tool, truck sub category where sales per store rose over 40% in the pandemic. The risk is both in units and pricing as that tools/hardware/equipment category started to roll over in the CPI data a couple weeks back. Additionally, you have the deflationary risk on the animal feed with corn and other commodities deflating, which saw inflation in a back in 2022 that were a help to comps. We expect to see both comp and margin reversion in the coming quarters. That gets us to about 10% to 15% in earnings risk and we think a multiple heading toward the mid to high teens vs currently around 21x, that means 20% to 30% downside for the stock.
Gap Inc (GPS) | Taking Higher on Best Ideas Short List. Fact, no one knows what the real near-term earnings power is here -- even within a fair band of confidence relative to other retailers (which is a moving target in itself). That's why we need to look out over a TAIL duration and see what the real underlying earnings power is after the new CEO pulls all his cost and margin levers and 'refocuses the brands' (not sure how that's possible without the capital budget to sustain real topline growth). If the company invests in the brands accordingly, numbers are coming down before they go up. Let's also not forget the credit card risk at GPS, management says almost nothing about the magnitude and risk here, even though its likely a significant contributor to EBIT. A credit event is looming here. We underwrite long term earnings power here below 1.00. Closer to 0.50-0.75. Let's be generous and give this a 10x multiple and you get to a mid-single digit stock -- a far cry from the ~21 you're looking at today. Further cost cuts could get people (who have had a love affair with this name since the new CEO started) more bulled up about earnings power, but we think it needs to invest sustainably around its content, up the consumer experience, build better consumer connectivity, and solidify a real value proposition. Even its crown jewel Athleta just comped down in the high teens. That's more than just a product tweak that's needed -- the organization needs a full retooling. And the same can be said about GPS in its entirety. A company that's been in cost-cut mode for 20 years can't just pivot to growth, and can't magically find cost cuts when it's already understaffed. We're simply not believers in this model, and will press the short if it heads higher around unsustainably high cost-driven earnings. This is a head fake, with the only thing going for it is relatively easy compares until around mid-2024. Multiples are looking peaky with FCF yield near its 15yr low on a higher rate environment.
