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.
Beyond (BYON) | Moving up to Best Ideas list. Same thesis as when we added it last week. New management, new strategy, new banners, and huge push to recapture the $1.5bn it ceded when the prior CEO made one of the biggest gaffes we've seen in retail in a while by simply turning off the overstock.com banner and switching to Beyond. Reckless execution that cost the company dearly. In the latest quarter, new customer acquisitions clocked in at +29%, which is simply massive. We think this team is very RH-esque – not afraid to swing for the fences repeatedly. Lemonis has a massive incentive to regain share, with 500k options at $45, 750k options at $50, and 1mm options at $60. The stock is at $27 today, and we think this could be a triple digit stock over a TAIL duration. No joke. Not a single Buy rating from Old Wall on this one, with price targets lingering around $32. We think we are headed towards a major upgrade cycle. Note that we're hosting a MAJOR event on Friday of this week (time TBD tomorrow – but likely around noonish), where we'll have Marcus Lemonis, Marc Cohodes (friend of the Firm, and the guy that maneuvered the chess board to put Lemonis in place as Executive Chairman), and me and McLean in the Hedgeye Studio to get to the bottom of the critical uncertainties here, and what will make this a massive stock over the next year, and over a TAIL duration. Lemonis is going on the road in 2-weeks, so he's giving Hedgeye clients a sneak peak at what's up his sleeves from an execution standpoint. This should be a 'lights out' strategic session on Retail, BYON, and CWH. More details to come. If we're right and BYON pushes $100, Wayfair likely trades close to $10.
Gildan Activewear (GIL) | Still Long, 2 Year Double and Upping a Notch Ahead of Nike. Best Idea Long GIL put up a solid quarter this week. Rev and EPS beat as revenue accelerated to +9% from +2%. There was some early replenishment in 4Q, so there is some shifted revenue from 1Q, with management guiding that to down LSD. That’s weaker than we would think even with the shift, keep in mind that the company has a special meeting in May to vote on board members, that should be shortly after the 1Q print. It needs to beat that print, so guide is likely conservative. The full year was guided inline, which we like to see, though that is with the company baking in some pressure from a Global Minimum Tax. We still see around 5% to 10% upside to the full year guide, and greater upside to numbers 2 to 3yrs out. The company repurchased $173mm in 4Q, about 7% of the float for the year. We think the P&L is about to see strong topline and margin trends, so we like the buyback it did at lower prices throughout 2023. The noise around potential management/board changes will provide some chop and turnover in the shareholder base, but the resulting setup will be a board and management team highly focused on execution and driving shareholder value. We think this is a great TAIL long headed to $60 over 1.5 to 2 yrs.
Short W, Long BYON. We like the pair from here as we think BYON will be driving share gains in a category that will remain under pressure. W is guiding to negative growth in 1Q, and we think it will struggle to grow all year given it remains in cost cut mode trying to put up positive adjusted EBITDA numbers. W is trading like a growth company, but its still shrinking. The competitive set is stepping up their game between BYON investing for share, ETSY launching new product offerings, AMZN increasing delivery speed and shopping capabilities, and SHEIN and Temu going super low price in home décor. W remains a Best Idea Short.
Floor & Décor (FND) | Shift Lower On Best Ideas Short List (for now). On the 3Q print, FND just about blew up the bull case talking down 2024 comps and cutting store growth. After an initial selloff, the stock shrugged all that off when rates dropped into year end. This quarter was ahead vs the conservative guide, but comps slowed slightly at -9.4% vs -9.3% last Q and quarter-to-date comps are down -12.8%. Management is once again guiding down the year, right in line with what we outlined in our preview this past weekend. 2024 outlook is EPS $1.75 to $2.05 vs street at $2.14. There’s no reason to trust that number, as last year it reiterated a $2.70 midpoint in May, but reported $2.28 for the year. After refreshing our model we’re coming in at the low end of that guide with $1.74. FND has been a frustrating short, earnings expectations for 2024 when we went short in fall ’22 were around $4.20… not clocking in around $1.92. Rate of change over the last 9 months has been ugly too. But from here its unlikely comps get worse in the upcoming months, so rate of change is less bearish, and given earnings have crashed and that stock hasn’t over the near term the short call now relies too much on valuation. The bull case seems to be massive comp and earnings upside when home turnover picks up and affordability gets better. The problem is home turnover has barely moved off the near all-time lows, supply is still very low and prices and rates are rising in recent weeks, and the fed ‘cut’ keeps getting kicked down the road. We think there is an increasing risk that the comp and earnings upside will end up being well below what is implied in the stock trading around 60x. For now we are shifting this lower given the massive negative earnings catalysts are behinds us. We’re thinking this company is ripe for a detailed deep dive on store economics and profit potential in various scenarios of home/consumer recovery. Stay tuned.
Booting Pool Off the Short List. We went short POOL in early January of 2023 at ~$315, calling for ~$12 in FY23 EPS (and $10 over a TAIL duration) vs the street $17. Our thesis was simple, the home ecosystem was in rough shape and this company was egregiously over earning due to a pandemic boom, which the street was modeling in perpetuity. Well, FY23 EPS just came in at $13.18, a far cry from the street’s original expectation and much closer to our sober estimate, yet the stock sits at ~$390 (23% higher than when we added it short)... Kind of a FND-like phenomenon where we got the model right but the stock ripped anyway. Consensus expectations for the year ahead are for a reacceleration and slight growth with EPS roughly flat. While the home and pool ecosystem are still in rough shape, we think a lot of the mean reversion that we expected is out of the way. With earnings expectations set much lower, we do not want to keep fighting this trend on the short side. This may be one to revisit in the coming months/years, but for now it is no longer a short. An expensive stock without a fundamental catalyst simply relied on 'hope' that the market will see the disconnect. But Hope isn’t part of our investing process. We're proud of our modeling on this one – but were ultimately wrong on the stock call.
UPBD Off the Short Bias List. We first shorted UPBD (formerly RCII) in January of 2022 at ~$45 calling for significant EBITDA reversion in a weakening home environment. We got just that, and the stock was shellacked -60% over a 10-month period. In July of ’22, it was moved down to the Short Bias list, where it has been moved up and down since… Over a year and a half later the stock is up to $34. The thesis for keeping it on the short side is that the company would face elevated default risk, and the categories it sells were still in reversion mode from pandemic overconsumption. On the bull side though, tightening lending standards presents a share opportunity for lease to own models like Rent-A-Center. While there is still risk within the consumer credit environment, we’re not sure there is enough earnings downside relative to incremental share opportunity, so we no longer want to be short UPBD.
Home Depot (HD) | Shifting To Short Bias List. HD with a guide down of comps, expecting another year of negative comparable sales growth. The market seems ok putting a peaky multiple on negative growth. As we look at the outlook, management is a bit more bullish on aggregate industry demand in 2024. Overall the framework around continued wallet reversion risk and pressure from home turnover and higher rates makes sense to us. We just think the industry can be down more like MSD to HSD making for negative LSD to MSD comps for HD, while HD is thinking the industry is only down LSD. A few points in comp variance gets us below the street, but HD (unlike LOW) has not been over earning on the margins line, meaning we need multiple compression to get material downside. Keep in mind that there is 53rd week help this year, and therefore drag in 2025. As it stands today, when we get an improved home turnover environment, HD is the name we’d be most interested in owning. Keeping it on the Short side for now on the comp risk. LOW would be our preferred short, we suspect it will have to guide down comps as well with more margin risk.
Earnings Previews
Lowe’s (LOW) | Still Short LOW Into Earnings This Week. As noted above, LOW will likely have to guide down demand like we saw from HD and FND, and we think LOW has the most risk around margin deleverage with the sales pressure. There is a lot of noise in reported margins from the closing of Canada, but we think the company has been over earning on gross margins given the trend in 2020/2021. Visits look ugly (below) still trending down roughly mid-teens, with the trend similar to that of HD. Like the home improvement peers, LOW is trading at a peaky multiple. We’ve got EPS for 2024/25 about 10% below consensus, with some multiple pressure we get to 20% to 30% downside over 12 months.
Best Buy (BBY) | Best Idea Short Reports Thursday Before The Open. We remain bearish BBY as we think the company still has sales and margin risk to come. Best Buy has been a Best Idea Short since fall 2020, and it remains a top short. Traffic continues to be weak, with visits down 10% to 15%. We think the continued pressure on discretionary spending will be a problem here, as is the replacement rate of long-lived goods that BBY carries that were over-consumed during the pandemic. Additionally, the depressed home turnover environment will be a drag on big ticket home durables that BBY carries like appliances and home entertainment. Lastly, and perhaps most important is BBY’s material but ‘quiet’ credit portfolio risk. As the company disclosed a few quarters back, when balances went up and credit quality went to peak, credit ADDED 50bps of margin. But now credit is going from tailwind to headwind, meaning there is arguably at least 50bps of incremental margin risk from credit alone, and the potential for much more if we see a truly weak consumer credit environment with recessionary levels of delinquencies and bad debt expense. We think you have 75 to 100bps of margin risk here just from credit, when this is only a 4% operating margin business. Management has launched a membership program trying to offset lower conversion of credit and extended warrantee attachment when sales shift online. So far it’s done ok, but we think that could start seeing diminishing returns over the next few months. Ultimately we have earnings downside to $5 to $5.50 and stock downside to the low to mid 50s vs current $76.
Acushnet (GOLF) | Staying Bearish into Thursday’s Print. Thus far we’ve been wrong on this short, with the stock continuing to make new highs with numbers coming ahead, and the multiple ripping to new (non-covid) highs. It’s now or never on our reversion risk thesis. MODG put up equipment profit down 23%, on revenue flat. Visits trends for the golf retailers (below) have been ugly. GOLF still driving EBIT higher and the expectation is for MSD EBIT growth again in 2024. We just can’t get there given the building inventories, return of promotions, unit consumption risk, and weak product cadence for GOLF this year. GOLF also rolled out a new line of irons, which have a lower turnover rate in the bag given less average wear and lower perceived benefit from replacement, so the elevated replacement trends of the last few years likely becomes a drag. GOLF is also lapping a recent Titliest Prov1 Ball launch from 1H2023, so the sales cadence should look weaker than prior years, and with more margin pressure from competition. Stock buyback has been a positive for long term earnings, but its being bought from Fila at the peak of the golf cycle. We ultimately think the earnings and multiple risk here put the stock 35% to 50% lower over a TAIL duration. If the short doesn’t working soon, we have to assess whether it ever will.
Big Five (BGFV) | Staying Short into the Print. BGFV, which reports Tuesday after the close, has been a Best Idea Short since November ’21 when the stock was above $40… It now sits almost 90% lower at $5.25 and we think it is ultimately going out of business. It's up there in our top three shorts of all time (SFIX and RVLV are two of the others). It fundamentally remains the worst house on a bad street, and after losing Nike as a customer in ’22, there is hardly anything redeemable about it. Hardgoods are mean reverting, softgoods have lesser brands placed on Nike fixturing – simply a disaster. Even since our last write up on the name in July ’23, the stock is down another 45%, putting its market cap at $118mm and making it even more impossible to borrow. We still think that if you can get your hands on some you should. We will be riding this to zero either way.
Birkenstock (BIRK) | Best Idea Short Reporting Thursday. We added this short at the IPO and then upped to Best Idea shortly after at ~$48 and it is now at ~$50. Let's call that a push in the grand scheme of things (we don't bicker about a few bucks in either direction right – we want to capture BIG moves. The company’s 2024 guide was roughly in line with the Street with revenues +17-18%, while we’re modeling closer to +13% for the year. We thin the first half will be respectable, as wholesalers replenish orders they sold out of during Holiday, but in 2H it faces an impossible revenue and margin comp. This should decelerate while other brands in retail are accelerating, making it a dangerous relative hiding place. The EBITDA margin guide for the year also matches Street expectations at 30%, but we’re modeling about a 25% margin. In the quarter Google trends were fairly volatile, peaking, but also seeing a rapid deceleration, in early December. Note that the company is lapping about 14 points of price increases over the last year and is now expanding into other product categories and having to spend to get those new platforms off the ground. The product extensions will pressure the margin line with new tools/molds, more materials, and different sourcing partners that will initially ship at small scale – and the footwear business is ALL about scale. On the Q4 call the company was cautious about the inflationary environment in Germany, where 95% of product and 100% of the footbeds are produced. This is not a company that takes advantage of the cheap labor and production in Asian or Latin American, so inflationary pressure here is a risk that cannot be ignored. Pod 1 (revenue) and pod 2 (margins/cash flow) will both be under pressure during 2H. We think this could be trading closer to $30 in the next 9-12 months, which ironically, is the price that Catterton wanted to sell it at in the first place, until the bankers walked them up to 48. This brand is kind of like Ugg, in that it could be +10% or -10% in a given year – no questions asked. It just happens IPO when the brand was at 'peak heat' with the consumer. We'll fade those almost any time.
Olaplex (OLPX) | Long Bias Reporting Thursday. We added this name long back in November at around $1.90 and it traded up in December to $2.50 and is now back down to about $1.96. All in, kind of a push so far for us. We don’t think that this quarter is going to blow us away and we think we could get a conservative 2024 guide, despite the easing comps. We do continue to see Google interest trends negative YY. It’s important to mention that about 40% of sales are professional sales, so salons or licensed professional stores, rather than the average consumer searching for the product. With the easing comps, we expect revenues to accelerate over the upcoming quarters. We’re modeling FY24 revenues up around 10% whereas the street is about flat for the year. We think the FY23 margins will be the bottom and we will see sequential improvement. Gross margin peaked at 79% and is expected to be about 70% this year, we have it getting back to the low to mid-70s on a TAIL duration. Historically EBIT margin peaked at 56%, fluctuating from 30% (huge leverage to the model – both ways), and is expected to be about 26% in FY23. On a TAIL duration we’re modeling a roughly 35% margin. We’re getting to about $0.27 in earnings power with a 14x multiple. This company is unlikely to be a bust, with about $650mm in debt due in 2029 and that fact that it consistently generates cash, with about $450mm on the balance sheet right now. The other option for this company is that it gets bought by a beauty conglomerate once revenues start to stabilize. We’re comfortable staying long this name here. Institutions probably won't touch it ‘til it triples. In our Bone, Bagger and Bust framework, this one is a bagger.
Inter Parfums (IPAR) | Best Idea Short Reporting Wednesday. We haven’t gotten this name right since we went short in July of ’22 at $80, the stock is now sitting at ~$150. Not only did we the stock wrong, but we got the model (and that pisses off McGough – unacceptable). While sales growth has accelerated the last two quarters, the upcoming quarter has a much tougher comp of +48%. Fragrance prices are up over 30% from pre-pandemic, which has been a revenue and margin boost, but we don’t think there is much pricing power left. Margins are pushing 18% for the year, up about 500bps from pre-pandemic. We don’t think this high-teens margin is sustainable and it will settle around 15%. We still don’t like the license aspect of this business, due to the riskiness of it. The FY24 comps are tough, having to comp revenues of +24-31% in the first three quarters of the year. We could easily see a revenue deceleration in the quarter reporting this week, it just depends on the magnitude. If we're wrong for the 4th quarter in a row, we'll likely punt this one and move on to other names in Beauty and Luxury – both sides. One thing that's worth noting is that this trades very well in Quad 4, and now with our Macro team's pivot to 'non Quad 4' environments in 2024, this name could be a relative underperformer. But we don't play the relative game. That's not how the real world of making money lives. It's all absolute performance – both sides. Stay tuned for our take on Wed.
Figs (FIGS) | Best Idea Short Reporting Wednesday Night. Last quarter this company put up a penny beat and took up FY guidance, the stock squeeze up 26% to just under $7. We’ve been short this name since it was trading around $11, with it now about $6. We think revenue trends are going to continue to slow this quarter and into next year. We think management is just too confident in the sustainability of the gross margin, currently at 70%. Over a TAIL duration we think this will fall to the low 60s as the company increases spend around SKU proliferation and international growth. We think this company will be at break even for years. Trading at 45x PE and 9.3x EV/EBTIDA, this stock is trading too high on wrong numbers. All of that said, if we get a sell off on this quarter, we're likely to cover. Our 'recession price' was $3 per share, and it's not clear (to us at least) that we've skirted a recession.
TJX Companies (TJX) | Best Idea Long Reports Wednesday. We’ve been long this name since ~$60 in March of 2022. Now the stock is almost at $100. Traffic in all three banners saw a significant deceleration in December, but has since accelerated to positive YY again. Last quarter the company closed the HomeGoods ecomm business, which had a slight negative impact on business. We expect revenue to continue to grow at MSD over the next few quarters. It has been a good buying environment and the company has been working on getting the right assortment to attract consumers. The street is coming out at $4.12 in EPS for next year, which could easily be $4.30-4.50 then getting to $5 the following year. If we put a reasonable 25x multiple on that we get a stock worth $125, so about another 25% upside from where it trades today. Will this stock make you rich? No. But it should continue to be a net share gainer in a space that is outgrowing the apparel category. Should continue to grind higher.
Warby Parker (WRBY) | Long Bias Name Reporting Wednesday Morning. We’ve been long this since October when it was trading at just over $14. The stock traded down to around $10 on the Q3 print in November but has since rebounded to ~$14.50. Visits trends look strong for the quarter reporting this week, but we’re seeing some deceleration in the Q1 trend. While we like the store expansion story here, tapping into new markets – with lower rents AND ones where the core consumer actually lives, which will ultimately help improve margins. We still believe the company can put up DD revenue growth for FY24 and beyond, but we’ll be paying attention to any color management gives on the call in relation to how the quarter is trending to date. Aside from store expansion, we like the contact lens angle. The company is working to grow this part of its business, which is a steady revenue stream and high margin. We think it has over $0.50 in earnings power over a TAIL duration vs the street’s $0.12 estimate for this year. With the stock at $13 today, that's a potential 2-3 bagger. Doing more research on the name to up our conviction level to Best Idea.
Revolve (RVLV) | Reporting Tuesday. We took this off our short list last week at $16 after being short it from $64 back in December of 2021. Got this one right for the right reasons. The TREND setup is less bearish now. Comps are easier over the upcoming quarters, after revenues have been down the last three quarters and will most likely be down in the print. Google interest trends look to be improving recently. The sale items trends at Revolve seem to be stabilizing, hovering around zero lately, which should help margins from a rate of change perspective. The return rate is currently sitting at a peak near 60% and that could easily revert back to the historical average of about 50%, which would be another top line and margin benefit. We could see us getting long this name in the near future, but don't have enough of an edge on this quarter to make that call today.
The RealReal (REAL) | Best Idea Long Reporting Thursday. Last quarter the company put up an in-line print and showed positive momentum with its new strategies. We did see GMV sequentially down but gross profit accelerated. The company guide implies continued GMV decline for the upcoming quarter. We aren’t worried about this, since it’s the execution of its strategy to focus on more profitable parts of the business that is causing the initial decline in GMV. The company is on track to have roughly breakeven EBITDA in Q4, and should reach its target of full year EBITDA positive for 2024. We expect the company to talk about new regions of where is sources product, given that there is ZERO demand problem here, it's all about supply. We also think a wholesale deal is on the table with a European luxury brand to be the exclusive re-seller of excess inventory. All in, we think this is a multi-bagger over a TAIL duration with it currently trading at ~$1.60. Safer bet may be to buy the bonds, though we like the call option on the equity at $1.60. If there's any incremental concern we have here it's that Amazon has been making a big push with its pre-owned luxury competitor 'What Goes Around Comes Around – WGACA'. It's inventory breath can't compare to that of REAL. But we obviously Amazon's marketing machine and consumer ownership is something we won't take lightly. We'll worry about this more with the stock at $5.
Carter’s, Inc. (CRI) | Long Bias Reporting Tuesday Morning. We added this name to our long bench last weekend. We’re not saying this is the quarter where the story plays out, but we think we could see improvement in trends with a Pod 1 (revenue) acceleration. We don’t expect the company to come out with bullish guide and blow out the street’s expectations for the year, which is roughly flat for revenue. After all, this company perennially sandbags the Street. About half its business comes from baby and sleep clothes which are highly defendable categories. This company is reliable and easily accessible for consumers and will continue to grow as Children’s Place continues to suffer (its store count likely to get cut in half). The stock currently trades at roughly a 13x PE multiple at $82. With improving birth rates, store growth plans, and higher incremental margins (which is not baked into consensus), we think this stock is worth more of a 14-15x multiple, getting to about 60% upside from here over a TAIL duration on our higher numbers. With a weak 1Q guide, we'd look to opportunistically scale up the position.
