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.
Did Hell Just Freeze Over? RH Supplanted By BYON As Our #1 Best Idea Long. This decision did not come lightly. We wouldn't go as far as to call this an 'end of an era' but RH has been rangebound as our Top Long for the better part of 3-years (and is still our #2 long). We still think it's a multi-bagger when the cycle turns – with idiosyncratic drivers fueling growth before then. But enter BYON – it simply will get you paid bigger and faster over a shorter time period. We think the growth and catalyst calendar here will prove to be explosive in 2024 – with new branding and new business initiatives coming to market literally every month. Things are coming down the pike with creative ways to build the brand(s) that traditional retail analysts can't even grasp. Influencer strategies with TV shows to reach a broad swath of America, Omnichannel presence to be built by (I think) launching shops inside the likes of HD and LOW. Baby, Backyard, Dorm...the list goes on with new business drivers. The Overstock banner relaunch also likely to be turned on on WayDay, which is a kick in the gut to Wayfair. And to be clear, WHEN BYON succeeds, it will probably make Wayfair (Best Idea Short) a $10 stock. We need to account for equity dilution as these numerous partnerships and initiatives come out, because Lemonis wants partners to have skin in the game on the equity. He's 100% aligned with the stock price. Compensated with 2.25mm options if the stock trades over $60 for 20 days. Would not be surprised if it gets there in 6-9 months – notable with the stock at $32 today. Our estimates – beginning almost immediately, are nearly 5x the 'consensus' and we build to $6 per share over a TAIL duration and $400mm in EBITDA, with the Street underwriting something closer to $2ps. This is, for all intents and purposes, a brand new company. Historical multiples are absolutely irrelevant, as is the 'historical margin structure'. We think margins are going from -4% last year to 12%+ over a TAIL duration – simply massive, with outsized Operating Asset turns that should drive ROIC to new highs. But the driver will be outsized top line growth, which should command a premium multiple. The pushback we get today is that it's too small and illiquid for many institutions to buy. But putting 20x EBITDA on this model builds to a $7bn EV, or a stock price of $150-$160. Can anyone say 'multi-bagger'? Lemonis can. So can McGough. This is going to be a classic 'I missed it' stock. People saw it go from $15 to $30 and they say 'I missed it'. Then it will double to $60. They'll say 'damn, I missed it again.' But even then, with $3-$4bn in cap and $70mm-$80mm in avg daily trading volume, it's gonna double AGAIN. So if you can't buy it today, you'll still have to time to get a 2-3 bagger out of this when it hits $60 and Lemonis' options vest. But do yourself a favor, do the work on this one. It's very poorly covered by Old Wall, and there's more idiosyncratic drivers to this story than any we can find in Retail today. This model is a game-changer. Calls like this don't come around too often.
Marcus Lemonis Fireside Chat on HedgeyeTV – BYON/CWH Replay: Click Here. Do yourself a favor, if you're a student of business, which you are, give this discussion a watch. It will be time well spent. I (McGough) have interviewed hundreds of CEOs in my 30-year career. Not a single one – not even Gary Friedman (who is one of the few CEOs I hold in high regard), comes close to the focus on strategy and execution that Lemonis is bringing to the table at Beyond, and has long had in place at Camping World.
Camping World Holdings (CWH) | Moving Up To Best Idea Long List. No, this is not McGough getting too much Lemonis Cool-Aid. Yes, I'm the 'dreamer' on the team – looking for MASSIVE outsized long calls that will go up by 3-5x. But fortunately I've got McLean to balance me out. He's my resident cynic who routinely 'attempts' to bring my feet back down to earth. He's the one who's focused on the precise building blocks to build from today to the 'dream the dream' scenario. When our call with Lemonis was completed on Friday, Jeremy looked at me and said something like 'this is gonna be big'. If you don't know Jeremy personally (you should, because he's a tremendous analyst) you'll know that this is a BIG statement from a natural born skeptic like him. But learning Lemonis' approach to managing business in downcycles made us revisit our CWH model this weekend, and while the catalyst calendar is not as robust as BYON (it probably hits $100 first), the reality is that the torque in the CWH model is simply massive. Keep in mind that this is a business with a competitor of 1 – Camping World. Then there's Mom and Pop dealerships that Lemonis and team have been rolling up at what we think is basically the cost of inventory, else threatening to open up a dealership down the street and putting them out of business. Call it ruthless, call it savvy – pick your adjective. But all we know is that when the cycle turns this model has SERIOUS leverage to the upside. The stock is likely to move FAST, and well ahead of estimates. Probably going to be another 'I missed it stock' for many, as people are waiting for signs of a turn to get involved. But with the stock at $27, there's a huge margin of safety in the model. We basically have to give time, time. Will the cycle turn in 6 months or 18 months? The reality is that we don't know. But we build to over $9 per share in Earnings over a TAIL duration, vs $0.81 last year. The Street is topping out at about $2 bucks. Importantly, leverage, which sits at 8.5x today, should come down to about 1x as our TAIL model plays out. This name is likely good for a 12-15x p/e multiple on an upswing in the cycle, when its competitive moat will be stronger than ever. That's a stock about $100 ABOVE where it's trading today. Could it be down 10-20% on bad cycle data. Of course, but then we'll simply take it higher on our list. Get in the game!
Lowe’s (LOW) | Shifting Towards Bottom of Best Ideas Short List. Much like the other home improvement names, we got the weak guide we expected, but the stocks have shrugged it off. LOW guided to another year of comp and earnings decline, but the market took the stock to right around all-time highs on valuation multiples, with EV/sales at a peak 2.1x, EV/EBITDA of 14x, and PE around 20x. That’s generally odd when looking at negative NTM growth, but we will admit that the next 12 months is at least looking like the trough of NTM EPS, that’s not to say NTM won’t be lower than current consensus (our model is below), but the NTM is likely to be the bottom annualized period (given 53rd week help in 4Q23). The company is now lapping the selling of Canada, so the P&L will look much cleaner YY, and we’ll get to see a clearer trend in margins. We continue to think LOW has greater margin risk than HD on gross margins, and with how much SG&A came out of the model in 2023, it perhaps has a weaker SG&A leverage setup, meaning less upside than might be expected on the initial comp recovery, which is driving some of our model variance in 2025. The market seems to be looking ahead to a home turnover recovery, despite the fact that mortgage rates have been ticking up and home prices are again rising ~5%, pressuring affordability. The fed cut target keeps getting kicked down the road and we are seeing indicators of inflation heading back to accelerating which could begin another Fed hike into the conversation over 3 to 6 months. The TREND rate of change setup in the P&L is likely going to get less bad, but we think it will be a while before LOW is comping again and beating numbers.
Best Buy (BBY) | Staying Short on Credit Margin Risk. Best Buy remains a Best Idea Short. We think there is still a margin event to come around credit. The company guided to ~20bps of margin headwind due to the rising delinquency trends in the credit consumer. We think there could be risk to the upside on that headwind, but perhaps more important is the fact that the guide included no hit from regulatory action on late fees, which has a rising probability of happening soon. For these retailer card portfolios, late fees make around 15% to 30% of portfolio revenue, and the incremental rev/profit share flows to the retailer at essentially 100%. The suggested rule of capping fees at $8 would take late fees down 70% to 80%. For BBY this could mean another 20 to 40bps of margin risk from late fees. Meanwhile, we don’t think the core business at BBY is likely to get much better given depressed home turnover, tight access to credit, and pressure on the consumer wallet from inflation. BBY isn’t overly expensive, trading at its somewhat typical 13x PE, but we think we could see some multiple risk here as the market realized TAIL earnings are 15 to 20% too high.
Acushnet (GOLF) | Staying Short, Don’t Think the Company Can Deliver Growth Again in 2024. This is one of the few pandemic winning categories that hasn’t cracked. Though, Callaway showed much more weakness than GOLF in 2023 when it put up -23% EBIT growth in equipment with revs flat. That’s the kind of EBITDA reversion risk we think we have at GOLF, despite the company just guiding to around mid-single digit growth. The wealth effect is perhaps a tailwind (high income core consumer) given market and home prices have been continuing higher, but we still see unit reversion risk in this category and pricing pressure as multiple generations of inventory sit on shelves with a return of promotions. For GOLF specifically, the product launch cadence is not as robust as last year, lapping a new ProV1 intro and only having a new line of irons. Has US golf participation increased some since 2019? Sure about 9%, but that doesn’t support GOLF retaining sales of 42% ahead of pre-pandemic, and especially holding golf club sales 5%+ ahead of 2019 when these are long lived goods. Stock is trading at 20x earnings, a big multiple for what we think will be negative growth. Buyback has been a tailwind as the company repurchases stock with excess cash being generated, including a lot from top holder Fila that took the company public. Ultimately, we think earnings numbers have to come down by about 20% and the multiple will come down alongside, still see downside to at least the mid-40s vs current $64.
Bath & Body Works (BBWI) | Adding To Best Ideas Long List. This is name we have been watching and waiting on since the LB separation where we moved it down from our Best Ideas Long list shortly after following a big win. We’ve been waiting for the right moment to re-add to the BI Long list, and we think now is the time. This is a quality, high margin business that has put up some of the best and most consistent comp numbers in specialty retail while facing a negative mall traffic environment. The company has a lot of control around manufacturing and product margins. The struggle has been the comp reversion after the pandemic boom of home spend (including candles/bath like BBWI carries) and excessive hand sanitizer revenue. We think the productivity reversion is in the late innings, and the company likely has earnings now at a level that we can see beats and upward revisions looking out over the next couple of years. This might not be a stock that will double or triple over a year like some other beaten-up retail names, rather we think you can get to 50% to 75% upside over 1 to 2 years in a more stable, high margin high cash return model. Elevator Pitch to come this week.
Purple Innovation (PRPL) | Adding to Best Idea Long List. The mattress cycle – which we correctly called was in for a massive downcycle about 2-years ago – is still probably in the 7th or 8th inning. But what we've noticed from players like TPX and SNBR (which we shorted from ~$110 to about $30 – it's now at $16) have consensus estimates that are overshooting on the downside. TPX is one of the more widely held names in the Hedge Fund world, but we think that PRPL has better upside. The stock is sitting at a measly $2 (more than doubling YTD), but we like the fact that the new CEO is from New Balance and is hyper-focused on innovation, and tiering product distribution by channels (DTC vs wholesale). Not for the faint of heart, like other 'bones', we think that institutions will start to look at this when it's a high single digit stock. We think Street numbers are too bearish – calling for the company to burn through cash in perpetuity. We get to real EPS starting in 25/26. As with other Bones, like REAL and DXLG, we'd recommend sizing positions appropriately, and not going all-in on these speculative names. We'd own a basket of all of them – just need one or two to work, though all three likely will.
Removing Two More Shorts From Our List. Continuing to pivot Bullish.
- Interparfums (IPAR): We've just been flat out wrong on this call. It pains us to take this name off the Short list when it's putting up margins that are 500bp above pre-pandemic. But the fragrance category has been among the hottest in beauty, with 30%+ price increases over the past three years. We've been waiting patiently for it to crack, or at a minimum mean-revert. But are losing patience with this name going against us; without a 'smoking gun' that prices for fragrances are going to come down anytime soon. Moving on to better ideas.
- Aritzia (ATZ-CA): We've been short this name because the company was way to heavy on inventory, and to an extent, still is. But the balance sheet is getting better on the margin, and gross margin risk is diminishing. We'd be interested in owning this name at a price – perhaps close to where it's trading today, as it has a unique customer product/value proposition, has a decade of square footage growth ahead of it (though we'd like to see 2x the store openings we're seeing out of this team), and a call option on a dual-listing, which would make it more appealing for US investors. Overall, a good business all around with a healthy growth algorithm where the rate of change on gross margin degradation is getting better on the margin.
EARNINGS PREVIEWS
Amer Sports (AS) – First Report as a Public Company. We added Amer Sports (AS) as a Best Idea Short before the company IPO’d when the bankers were looking to price at $17/share. We were right in that call, as the company promptly dropped its IPO price to $13, saving our clients some money (and costing GS about $25mm in fees)… Well, the story hasn’t changed, and this name is still on our Best Idea Short list with the stock at ~$17.60 after being bid up significantly over the past few weeks. We think AS is at/near peak rate of change--with its two red hot brands in Arc’teryx and Salomon--and will begin to decelerate over the coming quarters. The street is modeling a major growth hockey stick in ’24, but we just can’t get there, considering that growth at Salomon is coming from a shoe fashion trend, which can turn at any moment, and Arc’teryx growth is coming from China, which is an absolute black hole. The street also has gross margin expanding 300bps over a TAIL duration (150bps in ’24) to ~54.5%, as incremental growth continues to come from its Softline brands. We think GMs only gets another 50-75bps before they settle on a slowing growth algorithm. Some other key things to keep in mind are that there is a lot of secondary risk, with the lockup ending on July 30th, as 4 firms/shareholders own over 80% of the shares, and the company has over $6B in debt and has never turned a profit. We do not think this will be the quarter where the story cracks, but we'd be adding to the short position regardless of the outcome. While we love the Arcteryx asset, the company would have been better served to IPO this as a stand alone – would probably have gotten the same proceeds, and held on to the other brands to milk for cash. We think AS will be a single digit stock and wouldn’t want to own it till it is well below $10.
Arhaus (ARHS) – Still Bearish Into the Print. We’ve moved ARHS up and down our Short list since it went public and have had lots of success. Most recently we moved it off Best Idea list on to the Short Bias list after a -30% drawdown to about $8. The stock has since ripped back to ~$13, but we remain short given our variant view. ARHS has been fulfilling a backlog of orders, making its revenue trend look far better than its underlying demand trend. We should see some of the sales pressure from lapping the fulfillment of that backlog in early 2023. So, comps should look pretty ugly here in 1H24, which will massively delever the model. Underlying demand/order trends might be getting less bad, as visits look to be improving on the margin, though are still trending clearly in negative territory. This name is now trading at 11X street EBITDA and short interest is up to just 10% of the float. A fair price for the stock today is perhaps in the mid to high single digits, but the market looks to be getting ready for a home turnover recovery (albeit perhaps early) and with the unit growth potential, it is one that will work when we start to see home furnishings demand accelerate.
Savers Value Village (SVV) – Important Quarter for Us. We added SVV to out Short Bias list in October at $15.50 with a simple thesis noting that the street believed the long-term unit and comp bull case, while we saw slowing trends and significant post pandemic margin risk due to mean reversion in on-site deliveries (OSDs). The short was off to a hot start as the stock crashed -20% on Q3 earnings as comps slowed and management tempered the guide, but it has since ripped higher to ~$21 in an (obviously) rising market and after management blamed the comp slowdown on warmer than expected weather and incorrect product assortment on the floor. The Street has SVV reaccelerating sales and holding margins, while we think you are more likely to see continued margin pressure as OSDs as a % of supply trend lower, along with a continued down trend in comps (not good for the story built around perpetual low to msd comp growth). We see these trends on a name that is operating a highly capital-intensive growth plan and is trading at 13X EBITDA with continued selling pressure from its controlling shareholder in Ares Management. Savers is only on our Short Bias list, but we still think it is worth under $10 and wouldn’t want to own it until it’s a $5 stock. We will reassess our position after we get the 10K and are able to see how our call on OSD reversion is looking.
Burlington (BURL) | One Of Our Lesser Favorites In the Off-Price Space. Our favorite, Best Idea Long TJX, reported last week with an in line quarter and a guide down, with decelerating revenue trends. Short Bias name BURL is reporting on Thursday morning, and we still think it’s a good pair against TJX. Inventory turnover has increased, with the company buying more inventory and packing it away. We think this company is permanently broken. The management here isn’t going to have the turnaround that bulls think. The stores are too old, too big, largely unshoppable, and the company doesn’t have the buying organization that we see at TJX and ROST. People like this name as a turnaround in retail, but 9 out of 10 turnarounds in retail fail, and we think BURL will be one of them. It is to TJX and ROST what AAP is to ORLY and AZO. BURL will continue to lose share to TJX, that does spend and targets the trending items and brands to bring in old and new customers alike. While TAIL estimates have EPS climbing upwards of $10, our model has the company settling in closer to $7-$8ps. The only thing it has going for it is the category...but that's where all the good news ends.
Nordstrom (JWN) | Visits Trends Look Promising, But We Aren’t Holding Our Breath. The company reports Tuesday after the close and we’re bearish into the print. Visits trends at both the Nordstrom and Nordstrom Rack banners have seen improvements but comp trends have been negative for the last five quarters. While comps do get easier over the next few quarters, we still expect comp and revenue trends to be down YY. The company simply isn't buying enough inventory to comp. We just don’t buy into the bull case about the Rack turnaround. We can’t forget about the credit part of this story. Although Nordstorm does have a higher credit quality portfolio than other retailers, the bad debt is building. Credit card income makes up the majority of EBIT and looking at the whole space, things keep getting worse. We think the earnings power here is about $1.30 vs the Street at over $2. The stock is currently trading at ~$20, but we think its worth closer to $10.
Foot Locker (FL) | Critical Print For Best Idea Long FL. We went long this stock at $16.50 six months ago, and have since gotten a double out of it. Traffic trends look meh, though the credit card data has shown signs of life. Will this quarter reported on Wednesday be the big catalyst for the next run up? We're not so sure. What we are sure of is that over the next 6-9 months the narrative around Nike and Foot Locker will change dramatically. Nike is only about 50% of FL's assortment today, down from the peak at 76%. Nike has a revenue problem, as does FL. They haven't both needed each other to this magnitude since 2002. The path of least resistance for Nike to turn back on its revenue engine is to meaningfully step up its shipments of higher priced marquee shoes to its biggest wholesale partner worldwide. FL has made strides over the past quarter in partnering with the NBA and Nike (separately) to highlight Nike's brand in basketball. That's exactly what Nike wants to see. If we see FL's 'Nike ratio' go back above 70%, which we think we will (despite both management teams saying it won't happen – they're lying – we get to $7-$8 in EPS power vs the $2.50 that the Street is underwriting today. We think that's good for another double from here, even if we give FL a junky 8-10x multiple on a higher earnings base. Again, we're not convinced that this will be the quarter where we get the news of Nike opening the floodgates on distribution, but would be buying a sell off to the extent the company puts up a squirrely quarter while Nike is still at trough penetration.
