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.
Carter’s, Inc. (CRI) | Adding Long Side. This baby and toddler apparel company mainly operates in the US, with 14% of revenues coming from Canada and Mexico. CRI operates Carter’s, OshKosh B’gosh, Skip Hop, Little Planet, and has Carter’s Just one You for Target, Carter’s Child of Mine for Walmart, and Simple Joys By Carter’s for Amazon. The DTC vs wholesale split is roughly 45% vs 55%. There are two main product lines that make up the majority of the business; baby and playclothes are each roughly 35% of the total business with sleepwear in the mid-teens and "other" is also in the mid-teens. The Baby and Sleepclothes segment is absolutely bullet proof. HUGE competitive moat, as the number of brands that Mom's trust with their newborn are few and far between. Playclothes is a less defendable segment, as the brand competes with virtually every apparel retailer out there (everyone from Old Navy, to Target, to Nike). A key consideration here is that over the last 14 years the birth rate in the US has been on the decline and has just started to steady. All during that time, CRI was putting up revenue growth except for in 2020. Over a TREND duration we’re expecting the company to put up LSD to MSD growth rates while the street is at LSD growth. With a steadying birth rate, the need for baby and toddler clothes will increase and Carter’s is a reliable and easily accessible brand for all parents. The company has different price points and keeps its prices close to the private labeled brands in Target and Walmart in order to remain competitive. Into the pandemic the company was putting up a low teens margin and while this year it is expected to be around 10%, we think that it can easily climb back to the historic, low teens margin. Let's also not forget that Chidrens Place is in deep trouble. It will survive, but as a much smaller entity, which opens up market share opportunity for CRI. The company has store growth plans of an additional 250 stores by 2027 and it is on track to accomplish that. With the stock currently trading at roughly a 13x PE multiple at 82, we think over a TAIL duration there is about 60% upside from here. We think this stock is worth more of a 14-15x multiple with improving birth rates, store growth plans, and margin profile (which is not baked into consensus). We’re adding this name to our long bias list as we dig deeper here. But our initial read is that there's no reason this cant be a 110-120 stock. The company reports 4Q23 next Monday, February 26th. It's a 'sandbag then beat' kind of company, so look for weak 1Q guidance, a good point to scale up the position. Signal Strength is Positive.
MercadoLibre (MELI) | Removing From Long Bias List. We went long MELI on July 4th, adding it to our Best Ideas Long list on September 24th, and removing it from our Best Ideas list on December 17th. Since going Long, the stock is up nearly 50% with the XRT up about 13%. 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 are in 1Q24, the outlook for Brazil Argentina is a much less bullish Quad 4 and Quad 3, while Mexico is look at Quad3 in the middle Qs of 2024. At the same time, earnings estimates for 2024 have gone up another 2 to 35 over the last couple months. That takes our upside in numbers to only 5%, at that same time we are likely seeing a slowing rate of change in real time as we think 1Q24 has a moderate chance of slowing growth, with 2Q24 having a high probability of a slowdown. That means minimal earnings upside, with big multiple risk with the stock trading around 50x P/E. The 4Q print should show an acceleration and earnings beat, but the risk/reward on guidance, macro and rate of change dynamics doesn’t support being long this anymore.
Going Long Tapestry (TPR) | Just a week ago – when we took this name off our Best Idea Short list – we hinted that this is likely to be a 3-bagger over a TAIL duration. But perhaps we were getting too cute with timing. Could this stock trade down 10% when the deal gets done? Yes. 20% wouldn't floor us (the same upside that CPRI has when the deal closes at 57. But our key point where we're different is that we think TPR is calling the shots during the merger review period (whether that's legal or not), and that CPRI CEO John Idol is uncharacteristically taking it on the chin today by clearing out wholesale distribution such that TPR has minimal 'making up for past sins' work to do when the deal closes. We're expecting divestitures – like Kate Spade, which is a dog. Good riddance. Worst case it sells Versace, which we'd rather see remain part of the portfolio. But the reality is that the cash flow characteristics here allow this company to de-lever from 4.5x to virtually ZERO over a 3-4 year time frame. DON'T underestimate the impact of deleveraging on the stock price and the multiple. We could easily see us adding this name to our Best Idea Long list (on Long Bias list today) once the deal closes, and/or if the stock is in the mid-$30s.
Williams-Sonoma (WSM) | Taking meaningfully higher on Best Idea Short List. This stock over a 200-handle (226 today – peaked above 250) is simply ridiculous. Ever since Leonard Green bought a 5% passive stake (they did the same with Bed Bath & Beyond and look how that turned out) this stock's multiple has defied gravity. Management is also promising both top line and margin improvement, which we absolutely cannot backstop in our model. If the stock were trading at 80-100, then maybe we can justify the IRR on a take out in the 130 range. That's the teetering point on the LBO math. But over 200 is a pipe dream. We wouldn't be surprised to see LG take its short term profits and head for the exit. Then the multiple floor gets removed, this name no longer trades at 11x an unachievable EBITDA number, and it loses 30-40% of its value. The fact that WSM and RH stock prices are almost at parity is laughable given the idiosyncratic drivers RH has that WSM lacks. We'd be pressing this one hard here.
Cleaning House On Six Shorts...Yes, We're (not so slowly) Pivoting Long
- Revolve (RVLV) | This stock is down 80% since we shorted it. We're currently looking at a troughy rate of change in customer adds, while we're about to anniversary a spike in the (margin dilutive) product return rate to near 60%. Odds are that normalizes to the mid-low 50s over 12 months, which could make Gross Profits rip. We'll book the win here, and would consider going long at a price – though that price is in the low teens and it's currently at 17.
- Burberry (BRBY) | No more variant view. Cutting bait. Quality brand any way you cut it, one that consistently stays true to its roots. But one that performs morbidly in Macro Quad 4. With the Macro Team's pivot into a more favorable (for retail) Quad environment, and the fact that we're no longer modeling an earnings miss, we have no real variant view on this to stay short the name. Without that, we got nothin’. Moving on...
- Hugo Boss (BOSSY) | Punting the Short as we get more constructive on Luxury. This was a play on men's luxury apparel, which does not fair well in a crimped consumer spending environment, and especially during a recession. Well, for now it looks like we skirted a recession, and we have no real underlying problem with this business model, hence no unique 'hook' to remain short the name – as expensive as it is. But valuation is not a catalyst. We're getting more constructive on Luxury names. For now we'd play Prada (1913-HKG), which has a major management and organizational change that should drive the P&L to new highs.
- Urban Outfitters (URBN) | Anthropology is just too good to bet against. This division is about 45% of cash flow, and has absolutely been killing it while we were waiting for it as 'the next shoe to drop'. Didn't happen. Now we're starting to face very easy sales and margin compares in the Urban Outfitters concept (another 45% of cash flow), which could take estimates higher over a TREND duration. We put this trade on around 30 and the stock is now at 42. That's called being wrong. Our gut from this point is that as long as Anthro hangs in there, numbers are likely going higher, and the multiple with it. Getting rid of a mistake here.
- Fast Retailing (FCROY) | Still in big trouble – especially with SHEIN going after the jugular of flagship concept Uniqlo. But we think that expectations over a TREND duration are reasonable. Japanese stocks have this knack for defying gravity with multiples. And in the absence of identifying an earnings miss as the cycle turns out of Quad 4, we're cutting bait.
- StitchFix (SFIX) | One of our best shorts of all time. Closing this chapter. Rode this dog from 76 when everyone thought this was a tech stock, all the way down to 4 – where it's showing its true colors, as a share losing apparel company that abandoned its initial concept of curating assortment for customers to becoming an online department store with mediocre offerings. The company has about 2 per share i cash on its balance sheet – which it will burn through. But still, we'll happily take the win on this big call – that worked for the right reasons (though we took a lot of flack when we made the call – just like ETSY at 280 and W at 270).
Foot Locker (FL) | Moving ahead of Nike (again) as #3 name on our Best idea list. The punchline is that the reaction this week was relatively muted to the news about the new digital/social media/athlete endorsement partnership with Nike. This is the second move (the first was FL's partnership with the NBA) for FL to prove to Nike that it's serious about upping capital deployment in a Nike brand-enhancing way to get meaningfully higher allocations as the year progresses. We still think there's 7 in embedded EPS power at FL with Nike back at 70% of the store, which could happen as soon as 18-24 months out in totality. The STreet is underwriting only 2 in EPS growth, hates the stock, and thinks its 'too expensive'. Now at 32, we think the sell side will be upgrading FL at 40-50. We think it's headed to 60.
Earnings Previews
Gildan (GIL) | Reports Wednesday Before The Open. With the ongoing battle between some top holders and the board around who deserves the CEO seat, fundamentals have taken a back seat as it relates to the debate around the stock. There will likely be some shareholder turnover presenting both near term risk, but coming with opportunity around any disconnect in the stock vs where we think the underlying cash flow is going over the next couple years and beyond. Ultimately we think the CEO change will create a better setup for investors, as the resulting CEO and board will be highly focused on driving shareholder value and executing on operations. As for the quarter, we’re expecting eps inline to slightly ahead, driven by a revenue and (underlying) gross profit acceleration. Keep in mind one time gross profit benefit last year driving nearly 500bps upside vs the underlying business trend, so the GAAP y/y RoC trend won’t look quite as bullish in this Q as the underlying multi-quarter setup. As it relates to guidance, we’d suspect the company will just straddle the current street estimate of 3 in EPS. The new CEO Vince Tyra started in mid-January, and there is no reason to raise the bar yet, and a guide down would give too much ammo to the vocal shareholders ahead of the May 28 Special Meeting to convince other investors to shake up the board. Ultimately we’re coming out at 3.50 in EPS for 2024, and we think the company can do 5+ over a TAIL duration making for a double in the stock.
Still Short Home Improvement | LOW, FND, HD. HD and FND reporting this week. Best Idea Shorts with 25% to 40% downside risk for each name.
- HD will be reporting tomorrow (Tuesday) prior to the open. The key here will be what sort of outlook for 2024 will the company give, and the trade on that event will be on FND and HD. The market seems to expect a demand inflection in 2024, with HD comps expected to start the year down ~2%, but finish up 2%. Our take is that the reduced home turnover environment, outsized home consumption in 2020/2021, and pressure on the consumer wallet means we’ll see another year of spending reversion and negative demand in 2024. Recent data points suggest some home improvement categories starting to see price pressure, and traffic to the stores remains negative YY. Home depot is the best operator in the space and didn’t print excess margin in recent years like LOW did, so even with demand risk, it should have the least deleverage risk. We’re 10% below on HD, If HD comes out with a weak demand outlook, which we see as prudent, then you want to short LOW and FND. We think 2024 EPS numbers at HD are 8% to 12% too high, at LOW they are 15% to 20% too high.
- FND has been a much more perplexing story. Since we’ve been short starting fall 2022 earnings estimates have crashed, yet the stock had ticked up, taking the P/E multiple to 50x. Management basically nixed the TREND bull case last Q saying 1H 2024 would see comp pressure and it cut its store growth targets to preserve cash, yet the stock rallied on the late 2023 rate cooling regardless. The market is buying into a massive comp and earnings recovery on a housing pickup, with the expected starting catalyst to be a fed rate cut. The problem is inflation keeps coming in ahead, and the fed rate cut outlook keeps getting pushed out. So we think numbers still need to go down, and are coming in closer to 1.90 vs the street at 2.15 in 2024. The bigger risk perhaps is a developing TAIL bear case. If affordability doesn’t change much (i.e. home prices stay high and rates stay around MSD or higher), even if home turnover recovers, the comp and margin trajectory here could be much less bullish than the market is expecting with this 50x multiple. For now we remain bearish on the TREND, but this is a name we might have to do a deep dive on to outline whether even the consensus TAIL bull case still makes sense from this price.
Wayfair (W) | Still Bearish Into This Thursday’s Print. We've been moving Wayfair up and down our short list based on price, as it's one of the most volatile names we cover. Our batting average on this one is quite high. Wayfair’s category remains under pressure from a demand perspective with low home turnover, margins are also under pressure as the space becomes more promotional and competitive intensity rises with Beyond (the former Overstock now run by Marcus Lemonis) going right after Wayfair's jugular by offering steep promotions to take share and super low priced players like SHEIN and Temu applying further pressure. Ad costs have been up, in part fueled by Temu investing heavily for awareness and share in ecommerce. At the same time, Wayfair is promising both top line growth AND margin improvement, which is completely unrealistic. The street specifically is looking for a top line acceleration towards +MSD and EBITDA margins to almost double in 2024. The company recently announced a whole new round of layoffs, suggesting business is not good enough to preserve profitability. Alongside the layoffs, management guided that if revenue stays flat, and gross margins are stable, then the company is trending towards $600mm in adjusted EBITDA. The pieces to keep in mind are that $500mm to $600mm of that EBITDA is equity comp add back, and the company is already trading at a high teens multiple on that EBITDA level. Wayfair needs to see profitability hold and a big topline acceleration to keep the stock here or higher, we don’t think it can do both of those in 2024. W is a Best Idea Short with upwards of 50% downside risk.
Beyond (BYON) | No Call Yet. Can't tell you how many times we've been pitched this name Long side, but it's not on our Position Monitor, yet. Yes, we're impressed with what new Chairman Marcus Lemonis has done so far with the brand – attacking virtually every end of the commodity-spectrum of home furnishings, and claims that he has finally 'cracked the Wayfair Code'. The only thing we don't like is that he is killing the category today. Not in a good way, but is destroying price for the competitors like Wayfair and Amazon. His game today is all about taking share – no matter what the cost. BYON's balance sheet can afford it – while Wayfair's cannot. This name might be a raging long if the stock hits 15, but that's a far cry from 25 today. We want to like this name, but think that a very bad earnings event – and earnings reset – is coming our way. Buyer beware.
Carvana (CVNA) – We think this is a Bone, but the Print Should be Fine. We laid out our Best Idea Short thesis on Carvana last Wednesday, in which we walked through the sky-high numbers you have to underwrite to be a bull, auto retail macro, key near-term considerations, and ultimately our bear, base, bull unit economic scenario analysis which left us increasingly bearish on CVNA (CLICK HERE for Replay). We do not have a strong view on Q4 one way or another and would be very surprised if CVNA does not put-up numbers that are optically strong. The Street expects Q4 Used Vehicle revenues to be down -13% YY from -22% in Q3, Wholesale (ADESA) revenues down -16% YY from -12.5%, and F&I/Other revenue up 30% YY from up 17% last Q. Gross Margin is expected to be up +9 points YY from +7 points last Q, with SG&A expenses down -34% YY, flat RoC compared to Q3. That gets Consensus to $61mm in EBITDA. We assume that they beat this number, with major added benefits from continuing to sell of the excess originated loans that they built up on their balance sheet over the past year. This is likely the last quarter of this benefit, which the company will now have lap beginning in Q2 of this year. It’s also important to note that Used Auto Retail was notably bearish in the other Auto Retailers to report so far, with every company showing a deceleration in same store used revenue (except ABG which only accelerated from -13.5% to -12% YY). We think this is just the beginning of a major bearish environment for used vehicles and CVNA will suffer the greatest in that case. Best Idea Short. We think a base case is that this is a single digit stock vs 52 today – 90% downside over a TAIL duration.
Driven Brands (DRVN). DRVN remains on our Best Idea Long list into the print given its longer-term unit and comp growth story and because we think that it operates one of the most defendable franchises in all of retail in Take 5 Oil Change. The Street has comps slowing significantly from +6.4% to +2.4% with revenue also decelerating from +12% to +6%. EBIT Margin is expected to compress -380bps YY vs -380bps last Q, with EPS of 0.19, down -25% YY vs -37.5% in Q3. We are still seeing a moderate slowdown in the auto aftermarket businesses that we track as the consumer continues to defer maintenance with their wallet under pressure. Last Q DRVN noted weakness in the Car Wash industry and took action by closing down 29 money losing stores and changing leadership + team structure and priorities. We expect to see some of those downstream effects in the coming Qs. We are not overly optimistic on this Q in itself given the market dynamics with elevated rates and slowing near term trends, but we think that over a TAIL duration this company will succeed. It just needs to hit numbers for a few quarters and keep the long-term growth going and it could be a triple. Good activist target to split the car wash business – a perenially low multiple business – from the growthy, higher multiple maintenance business.
Camping World (CWH). We took CWH from the bottom to the top of our Long Bias list in early November at ~18 and it now sits 40% higher at 26. This is a name that we really want on our Best Idea Long list once we get confirmation that the RV/Trailer cycle has turned, as the earnings power it could build to as it continues to consolidate the industry during this downcycle is significantly higher. The Street is underwriting 2.30 in FY25 EPS, while we are multiples (like 3X) higher… That gets you seriously paid, even on a lower multiple. We do not have a specific call on this quarter as we likely remain near a demand trough with store visits near the lows (and industry trends could surely worsen), but total RV shipments continue to accelerate over the past year on both the YY and 2Yr trends. The Street expects sales down -10% YY from -7% last Q with gross margin down -50bps from -180 and EBIT Margin negative resulting in EPS of $(0.53). This is a 'buy on weakness' stock. The reality is that once there is even a slight inkling as to a turn in the cycle, this could be a 40-50 stock in 3 trading sessions. We don't want to miss that move.
Mister Car Wash (MCW). Mister Car Wash, sitting in the upper third of our Long Bias list, has rallied ~80% since its November-23 trough. Now ~9.10, MCW is nearing its July-23 price from before Mr. Market revalued Car Washes much lower after realizing car washes are less of a “staple” than the market thought they were. We still like this name over a TAIL duration and believe it can achieve a multi-year comp acceleration as it continues to roll-out and capitalize on its new Titanium360 product, which is the company’s first product enhancement (and de facto price increase) since 2014. Comp Traffic (shown below) looks strong over Q4, but has since trailed off. This is staying on our Long Bias list into the print, and we will dig into our model and reassess our thesis once we get more info on ’24 expectations.
Upbound Group (UPBD). Upbound, which operates Rent-a-Center, remains on our Short Bias list. Last Quarter, the stock traded down into the print, but bounced on moderately better than expected numbers and an acceleration in its business units (though still negative YY). The Street has its biggest segment, Rentals & Fees, revenue accelerating from -3% YY to +1%. Given that this is the lender of last resort, it should be taking share in furniture in this environment until the consumer credit cycle fully bottoms. However, the data is showing that delinquencies are at cycle highs and have accelerated at a rate beyond the GFC… that means UPBD is likely also facing a higher delinquency rate, which was up from 2.6% in Q1 to 3.1% in Q3, and potentially a higher “skip-loss” (customers not paying for goods) rate, which did improve last quarter, though. That means more financing risk to the company and thus more downwards earnings pressure in a category that has been significantly overconsumed since the pandemic.
