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.
Skechers (SKX) | Upping to #2 – ahead of Nike (NKE) on Best Idea Long list. Outlined in our note an updated Elevator Pitch post the quarter/sell-off. Thesis still squarely in-tact. We have the company accelerating top line in 1Q, and beating EPS across durations. See note and EP HERE.
Decker's Outdoor (DECK) | Moving ahead of ONON as our #1 Best Idea Short. Black Book on Wednesday.
For several years DECK was a story of an Ugg Stub with a powerful underlying growth story in HOKA. We were onboard long side for over a year and a half (from 250 to 650) of that as Hoka took large chunks of share in the running category. Now, the big ramp in valuation suggests that this is now a HOKA AND an Ugg growth story. The only way we can get to upside from here is if HOKA continues its growth path with no hiccups and Ugg suddenly inflects to a teens+ grower over multiple years. Valuation is irrelevant while the P&L is accelerating, but we think 2024 will mark a notable deceleration in sales and the emergence of margin degradation for DECK. That's when a 22x EBITDA multiple and eye-popping 4.9x EV/Sales number needs to be flagged. HOKA is probably carrying about a 25x-30x EBITDA multiple now, with Ugg closer to 15x-20x. We think as the competitive environment in running materially intensifies, ONON blows up (a valuation proxy for HOKA), and Ugg faces an impossible year to comp against next year – with just as great a chance it puts up a -5% top line as +5% – this name gets materially re-rated lower. If our numbers are right out-year EPS expectations are likely 30% too high. This CEO is no dummy. He's leaving at a young age and is gifting his successor a precarious position with a tough P&L trajectory to manage.
Call Details:
Wednesday February 7th at 10am ET
Live Video Link CLICK HERE
Add To Calendar CLICK HERE
Valvoline (VVV) | Cautiously Bullish Into This Week’s Print. We think the VVV numbers this week should look solid, albeit with decent likelihood of slowing rate of change as visits on average look a bit lower (2 to 3 points) than the visits trend in the prior Q. We’re looking for 7-9% comps in fiscal 1Q and roughly a 10% EPS beat. Our call, though, is not around this print or even the TREND opportunity, rather it is the big long term growth as VVV ramps its store base and continues to gain share as the category killer in quick service oil change. The stock has done well over the last few months after it took a hit in the summer from the “comparable” market multiples coming down (think car wash companies), and slowing comps applying some pressure to the VVV multiple. Trading at 21x EPS and around 13x EBITDA today, we think there is upside to both the numbers and the multiple over a TAIL duration. We think the stock is 50+ over 2 years vs being around 36 today.
The Container Store (TCS) | Cautious Into The Print. This will be yet another squirrelly print for TCS as the demand issue for home related retail continues. The company already announced sales coming in about 5% below the previous expectation, and that some profitability hit should be expected with that revenue miss. Yet the street still sits within the old EPS range, so there is arguably risk of a headline miss on EPS. Forecast accuracy here has been awful, perhaps that’s in part around motivation internally to achieve better numbers, but externally looks like the CFO can’t put an appropriate bear case on revenue together. This quarter will at least have rate of change in revenue, from down 19% to down 15% and compares do get much easier from here over the next few quarters. We’ve been bullish here as we think the company can execute a store growth strategy for what is a relevant store value proposition. The stock is trading like some type of dilutive capital raise is needed, and if the home retail environment takes a long time to recover, it is possible we see something like an dilutive equity deal backed by Leonard Green. We think the risk reward over the long term here is still very attractive, but there near term will continue to have volatility. The CFO outlook on liquidity and free cash in 2024 will be key, since if the company can remain FCF positive this year, the stock should be going higher over the near term.
OneWater Maring (ONEW) | Moving a Few Notches Higher On Best Ideas Short List. ONEW missed earnings slightly this week, but reaffirmed the year. That was good for a little rally in the stock after the concerns from HZO and Malibu earnings in the days prior. The commentary from ONEW around guidance includes somewhat contradictory commentary when compared to HZO and Malibu Boats. ONEW is talking about a new normal, with the usual seasonal cadence while sticking to its initial earnings outlook. The others flagged bloated inventories and lots of discounting risk. The HZO commentary looked very different from a quarter ago, no reason to think we won’t seem something similar from ONEW in a quarter or two, alongside a big miss/guidedown. As for the timing flagged preview last week that ONEW’s customer deposits and implied backlog looks higher than HZO, so perhaps has more time working through that than HZO does, but we think the ultimate outcome from industry demand weakness and discounting is approaching on the horizon. The reiteration is just kicking the can down the road. We think ONEW EBITDA is heading towards $100mm to $120mm over the next 12 months. This company has $950mm in debt (albeit roughly half floorplan debt), for net debt of about $850mm. A HSD multiple on that EBITDA and you could argue there is almost no equity value here. We think HZO could easily see 10 in the downward revision cycle ahead. Best Idea Short.
Tapestry and Capri (TPR & CPRI) | Reporting Thursday. It’s been relatively quiet on the merger front since November when we heard about the FTC Second Request. This week both stocks saw some movement opposite where they sit on our list. CPRI, Best Idea Long, traded down almost 5% on Thursday and then recovered some of those losses. TPR, Best Idea Short, traded up 2% Thursday and continued to climb up Friday. CPRI has pulled guidance, but we’re expecting to see an acceleration in revenue for the quarter, albeit on easier compares. We think the company is prepping for the deal to go through, so we wouldn’t be surprised if wholesale had a big growth acceleration with the CPRI wanting to put up strong revenues (unhealthy behavior that TPR will have to pay the price for after the deal closes). TPR guided to revenue growth of approx. 1.4% for the upcoming quarter, which would be an acceleration from Q1, on easier compares. On a constant currency basis we’re expecting revenues to be roughly flat YY. While we like what Coach has done over the last few years, bringing the average age of its consumer down and attracting a new generation without completely alienating its older consumer, it has to comp the comp and we think that is where the struggle lays. A good portion of that growth has come from the increase in AURs over the last few years of +30%. While we think Coach is actually a good brand, we aren’t so sure about Kate Spade. The brand has had a $2bn revenue target for more than five years and hasn’t even surpassed 1.5bn in that time. The brand serves a niche consumer, and that’s what it does. The company has no leverage as of today, but once the deal goes through TPR leverage immediately goes to ~4.2x. It's likely that the company will cut Kors wholesale distribution, taking down EBITDA. In a downward revision cycle we could see leverage get to 4.5x-4.8x, taking this to 6x EBITDA. That’s good for a 10 stock, vs the nearly 40 today. Of course, if the FTC blocks this deal, all bets are off. But we have 80% confidence that the deal will happen, with some likely concessions – like divesting Kate Spade – which would be a Godsend given that it's a perennial underperformer and has no hope of hitting company targets. Based on what we know today, we'd be long CPRI today and short TPR.
Ralph Lauren (RL) | Reporting Thursday. Best Idea Short is reporting Q3 this week. Last quarter we saw revenues accelerate on easier compares, but the Street isn’t expecting that to continue. 2H24 has much easier compares than 1H but the Street is expecting revenues to decelerate, ending the year +2%. We’re also modeling a revenue deceleration on easier compares, with the year ending roughly flat YY. Starting during the pandemic the company has been consistently implementing AUR increases of at least HSD up to nearly 20% some quarters. These continuous price increases make it more difficult to comp the comp and aren’t a sustainable growth path. Even with double digit AUR growth the company, over the last five quarters the company has put up revenue growth down LSD to up MSD; i.e. units are down. As the company continues to increase AUR the customer will find it more difficult to spend up for the product. While its unlikely that the company misses the quarter, the puts and takes regionally and on AUR will be key. Bulls see Asia as a big growth driver, but it could very well be slowing and not seeing the signs of improvement as they hoped. The stock has traded up about 25% since the last quarter’s print. Currently trading at roughly 14x earnings, on too high of EPS, there’s still downside in this stock. Next year we get to a little over $10ps in earnings and the company should get about a 10x multiple given that its currently in a taking up prices phase at the same time we're starting to see apparel prices in aggregate deflate.
Auto Retail Preview and Penske Automotive Group (PAG). As we called out pre-Group 1 Automotive earnings, we continue to receive incremental bearish data points on the Auto Retail industry. Aside from those we noted last week (dealerships closing, NADA book values falling, affordability, etc.), we learned Friday that New Vehicle SAAR RoC fell significantly from +19% YY in December to -1% YY in January and also got insight into Auto Retail earnings via GPI, which reported a deceleration in all revenue segments beside F&I… Penske Automotive Group (PAG), which like GPI, is on our Long Bias list as a hedge/pair-trade to our overall short Auto Retail thesis, is the next to report on Wednesday 2/7 after the close. The Street has new vehicle sales decelerating from +14.5% YY to +4%, used vehicle sales slowing from +5% to +1%, F&I accelerating from +1% to +3.6%, and parts & service slowing slightly from +12.4% to +10%... considering how far off consensus was with GPI’s results, we wouldn’t be surprised to see something similar here. However, we do believe that PAG’s higher % of luxury vehicle sales will help to insulate it more from the overall new vehicle downturn (but still slowing). Given what we have seen across the industry, used sales could easily be negative here, while parts & services may not come in as strong as the street expects (consensus had GPI P&S accelerating when it actually slowed by ~5 points). GPUs will continue to fall and margins across the different revenue segments will be pressured. Overall, we remain increasingly bearish on the Auto Retail complex, particularly on companies with high exposure to used vehicles, levered balance sheets, and credit risk. CVNA & LAD are Best Idea Shorts and KMX & SAH are on our Short Bias List.
Two Short Bias Names Out With Earnings This Week...Both Are Best Idea Short Candidates If They Rally On A 'Less Than Horrible' Print.
- VF Corp (VFC) | The Street is looking for a 31% decline yy in EPS for VFC this quarter, accelerating to -11% in its FY4Q (March), and then a whopping +30% growth in the upcoming year. We think we're likely to see the company hit the quarter, but lower the hockey stick guide, or at least temper expectations. This company has the worst kind of problem, Zero brand heat at any of its flagship brands (with Vans – its biggest brand – comping down in excess of 20% and no fix on the horizon). The CEO passes the smell test for most people we talk to – as people want o be bullish bc 'everything he touches turns to gold'. But we'll take the under as it relates to VFC. This company has a brand problem, and a balance sheet problem, which can't co-exist. The only way to fix a brand problem quickly is to double/triple R&D and Marketing spend, but they're going up against Nike who is secretly crushing it in Skate. In all likelihood, VFC will be forced into a corner and sell one of its three crown jewel assets – Timberland, being the most likely candidate – in order to service its maturity schedule. Any way we cut it, this is a melting ice cube. And its one that's trading at 11x EBITDA. A levered conglomerate of average brands that are comping down in no way deserves an 11x EBITDA multiple. It wouldn't shock us to see this name trade at 7-8x EBITDA, which puts the stock just below 10 vs its current 17.
- UnderArmour (UAA) | Similar to VFC, the Street is looking for -30%+ EPS decline this quarter and next. That's probably realistic. But naturally, the Street is looking for a 25% rebound in 2025 (March) that we're not convinced will happen. Multiples here are a little more down to earth than VFC, sporting an 8xEBITDA multiple and 13x p/e. That's not out of the realm of what we think is reasonable for UAA. We simply think it's going to have another down year in 2025, especially as competition heats up materially in the apparel (Lululemon, Vuori, Alo, Rhone, etc...) and Footwear (Nike, Adidas, Puma, Asics, Lulu, Brooks, Saucony, On Running, and Hoka). Several brands are going to get squeezed as the brands compete on product (likely good for retailers like FL and JD), and we think that UAA is going to be one of the losers. The stock is at 8 today, though we'd get much heavier with a double digit stock or if our research call gets us to lower estimates for next year based on what we learn from this print. Punchline, new CEO not spending enough capital to get this brand going again. And this is a business where it costs money to make money. UAA is falling short. No reason this can't be a 5 stock. We get it – that's not huge downside from 8, but again, if people get excited about this quarter coming in 'less horrible than expected' we get more interested short
