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.
Tapestry (TPR)/Capri (CPRI) | Removing TPR From Short List – Reiterating CPRI Long. Based on the numbers reported last week, we think that Capri is taking the lumps today that Tapestry would have otherwise had to take after the deal is completed – most notably in rightsizing the wholesale channel in Kors, Versace and Choo while still under CPRI ownership. Quite frankly with John Idol still running CPRI, we're shocked by this level of discipline. A conspiracy theorist might argue that it's TPR management calling the shots at Capri. Either way, we think that CPRI making the tough moves today mitigates the risk to the TPR P&L after the deal is completed. As for the deal itself, we think with 90% probability that the deal gets done. We might need to see divestitures to ameliorate FTC concerns – like selling off Kate Spade, and worst case Versace. But if that's the case, it will help leverage (and getting rid of the unfixable Kate Spade is a Godsend). We still think that the best play today is to buy CPRI for the 22% return to the deal price, which is firm. When the deal gets done, we still think that initial upside to TPR is limited from its' current $42. But on a sell-off, we'd likely go long the merged entity (TPR) in size given the tremendous deleverage potential with such massive cash flow on a merged Coach/Kors. Maybe we're getting too cute with timing here on TPR in not going long TPR today, as this could be over $100 over a TAIL duration (vs $42 today). But we'll be patient on this one.
Taking Two 'Bones' Off Our Long Bias List – PLBY and RENT. We're probably calling the bottom in both names here, but are cutting our losses on two bad calls. RENT was simply a bad bet on the asset value in the leader of the rental apparel business. It never made it above the lower half of our Long Bias list. PLBY, however, is the worst tattoo I (McGough) have ever had in my career. We went long the stock at $15, watched it quickly climb to $50 – and felt like heroes...and then rode this dog down to 'bone' status. The reality is that this company is probably not going bankrupt, should see cash flow improve from here, and is fundamentally worth at least $5 per share. But to be frank, it makes me sick to see this name on our Position Monitor – even dead last on our Long Bias list. If I owned the stock personally, I'd probably hang onto it out of sheer morbid curiosity as a call option on a management change and asset sales. But the only thing worse than making a mistake in investing is sticking with it. There are simply too many good TAIL long ideas (like RH, GIL, NKE, FL, etc... see list below) to continue to hold onto baggage.
The Container Store (TCS) | Removing From Long List. Despite the weak business trends during the home retail slowdown we had remained long TCS on the TAIL earnings leverage around unit growth when we would see an eventual recovery in demand across the space. With the stock trading like it was going to face a dilutive equity event (which was and still is possible), we felt the upside of the stock trading at multiples of its current price meant the risk was worth it. Unfortunately, the story has changed as the management team has delayed and paused store openings to preserve cash over the near term. That means any upside from unit growth is either off the table or pushed out years, so you have the risk near term if home retail doesn’t recover, but lost much the upside over a TAIL duration. That’s not a setup we want to be long in a volatile micro cap stock. Removing this from the long list.
Valvoline (VVV) | Still Long VVV. Valvoline finishing the week at all time highs after an inline Q and reiteration of the full year on its 1Q print. The company reiterated stock buybacks as a core part of the capital allocation strategy. Comps have slowed in recent quarters, but the taking a look at the absolute level of growth it’s some of the best and most consistent growth seen across our universe. Comps of +7% revenue +12%, income from continuing ops of +25%. We think comps are likely to hold this level if not improve throughout 2024 and we’re coming in with EPS about 10% ahead of the street this year and nearly 20% ahead next year. With HSD comps and still a long runway of unit growth this stock should get a 20x+ PE making for a stock of $50 to $60 over 12 to 18 months (vs $40 today).
TopGolf Callaway Brands (MODG) | Still Bearish into 4Q Print. The bar for the quarter looks low enough, but the expectations for growth at both TopGolf and the golf equipment side look too high to us in 2024. Clubs should see another down year as aggregate golf equipment consumption starts reverting. Callaway has 5 generations of new drivers (Mavrik, Epic Speed, Rogue ST, Paradym, Paradym Ai Smoke) alongside used, on the websites or sitting on shelves at the major golf retailers like Dick’s Golf Galaxy and PGA superstore. That’s price points from $250 to $600, we think that means too much inventory and pricing risk for new clubs when the consumer is out shopping looking for more value. Visits trends to stores suggesting the Christmas week shift bump, but weak trends outside of that. On the TopGolf side, visits also looking weak, down YY for the last few months. As our co-covering analyst Howard Penney notes on TopGolf, this type of discretionary Eat-ertainment venue is going to have problems as the consumer continues to feel the wallet pressure, traffic likely remains under pressure into early to mid 2024. MODG is still trading around 40x PE, with leverage on the balance sheet. We think the company needs to guide down or risk missing in the coming quarters. That should take the stock lower. The short has worked since we added in the Summer closer to $20 ($14 today), but don’t think its downside is done. This should be a single digit stock.
Lithia Motors (LAD). Best Idea Short LAD reports on Wednesday before the open. We are not overly bearish on this quarter in itself relative to the bloodbath we've seen thus far in Auto Retail earnings (i.e. a miss is probably priced in). But we're negative on the group as we still see nothing but downside risk to numbers over a TREND and TAIL duration. We outlined our industry thesis – and for Lithia specifically – in our November Auto Retail Black Book (Click HERE for access). So far, all three auto retailers that reported (GPI, PAG, ABG) have missed on headline EPS. We think this will be the case for Lithia as well. Consensus is modeling a slight deceleration to +16.5% YY growth in New Vehicle sales, a slight accel in Used to +6.5% YY, an accel in F&I to +6.7%, and accel in P&S to +18.3%. We have new Sales coming in a bit lighter, slowing to mid-DD %, with Used sales slowing as well and continuing deeply negative on a same store basis. Like the other auto retailers, we see continued pressure on GPUs in the range of down mid-DD % with SG&A expense up DD YY further pressuring margins. That gets us to under $8 in EPS this Q. We think the real kicker comes in ’24-’25 as LAD looks to continue to push its aggressive acquisition targets in a greater risk environment. We think that over a TAIL duration, this name is worth at closer to $150 (at $303 today). Best Idea Short LAD.
Sonic Automotive Group (SAH). We believe Sonic remains the worst run auto retailer in the space and it sits on our Short Bias list as a levered play on the carnage we expect to continue in Auto Retail. But, that doesn’t necessarily mean it has the most downside, given how much lower expectations for the business are. The street has New Vehicle sales slowing significantly from +15% to +3.5%, used vehicle sales down -4.5% from down -1%, P&S up 8% from +12%, and F&I from +5% to flat. We are surprised with how bearish the street is on SAH’s New Vehicles segment, but do recognize that Sonic is more exposed to Chrysler, Jeep, Dodge, Ram vehicles (which have shown very bearish trends over the past few months), either way there could be upside to +3.5% this Q. Given SAH’s large Used revenue exposure, and how poorly Used has performed over the last few months, we think there is far greater Used risk on the topline than what the street is modeling here. We know that SAH has done a good job cleaning up its' Echopark business and making it profitable with more rev on a smaller store base, but the rate at which used vehicle prices have fallen and affordability still being low could be a major issue for the business. We think SAH misses the Q, but that is likely baked into the price here. We're looking to get heavier on this one with the stock over $60 – worth about $35 over a TAIL duration.
