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
Lululemon Athletica (LULU) | Going Short Ahead Of The Print This Week. We were short this name back in the spring and pulled it off but we think the current growth drivers aren’t strong enough in an increasingly difficult competitive landscape. What concerns us here is a few things, a) the competitive entrants – like Alo, Vuori, Rhone, Set Active, 437, Beyond Yoga and other upstart brands – are greater than we've seen – EVER – for Lulu. That concept is not new, but we think they're getting to a point where they'll start to rob this company of comp dollars. Lulu continues to spend on the footwear extensions, with the men’s launch last month. As we’ve said before we don’t like Lulu getting in the sneaker game, as the Lulu consumer simply does not want shoes from the brand. Women's was meh last year, and men's this year should outright fail. Big working capital suck, margin depressor, and management distraction. China is one of the bright spots, which accounts for about 13% of revenue, and we're positive China factor exposure at Hedgeye. But we think weakness in other core markets will limit upside to the model. The Street is expecting a continued top line deceleration from 19% to 15%, while we’re modeling out more like 13%. We expect revenue growth to continue to slow to LDD over the next few quarters, while the street is in the MDD. Over the last few quarters the sequential margin improvement has begun to weaken, going from +360bps in Q1 to +100bps in Q3. The Street is modeling GM to be up 360bps in Q4, which we think is too bullish. Pre-pandemic the company was operating at low-50s margins, and now it's in the mid to high 50s, ultimately, we think footwear will be margin dilutive – especially in Mens. Last quarter when the company officially stopped selling the Mirror device, it recognized post-tax asset impairment on Mirror and lululemon studio of $72.1mm. It does not seem like another impairment charge will be had this quarter, although we are lapping a $442.7mm impairment charge from Mirror in 4Q22. Looking at the traffic trends during the quarter, they were up in November but then sharply decelerated and have been negative since. Point of sale data is worse. The end of the quarter as well as the start of Q1, don’t look very promising just on business trends. Perhaps by the time we start getting high-frequency data, it is somewhat ubiquitous, we get that. Recent sales weakness is probably in the stock. But it's slowing in the go-forward algorithm that gets us concerned. The stock is currently trading at a 32x PE multiple, probably more deserving of a mid to high 20’s multiple on OUR (decelerating) growth estimates . Over a TAIL duration we have earnings power of closer to $20 with the Street over $23, which could easily push this stock closer to $300 vs $465 today. The name is starting on our Short Bias list. We'll likely get heavier if the company pulls on out on Thursday's print, or as we get deeper in the research and get thesis confirmation.
ThreadUp (TDUP) | Taking Off Long Bias List. This has been a frustrating name – one we got wrong. The question is not around whether it meets or beats the quarter, but rather, whether this company will be around in 3-5 years. The stock is a certified BONE at $1.90. If it survived, it heads back above 10. If it fails, you've got downside to Zero. We don't like even a minute probability of going to Zero for a name we're long – regardless of the upside potential. To be frank, it's a coin flip. On one hand, TDUP has a competitive moat around the second-hand apparel space, which is a secular grower. On the flip side, as we outlined in our SHEIN presentation, we're likely going into a deflationary wave unlike anything we have seen since the early 1990s in Apparel in the next 3-years. That's as SHEIN disintermediates just about every other apparel retailers with spot-on like for like product at an 80% discount. Is the product garbage? Yes, but don't underestimate the number of people out there who buy garbage. Consensus has EBITDA turning positive this fiscal year with a quick ramp by FY26 to over 10%, meanwhile we don’t have EBITDA turning positive until FY28. Bottom line, we don't like the risk/reward. This is not like REAL where we see a clear de-risked path to a 2-3x-bagger from here over 12-18 months. It's massively speculative, without an idiosyncratic story to the upside when we're headed into the biggest deflationary (margin destructive) environment for apparel in a generation. Moving on.
HIBB (Hibbett Sports) | Covering Short Position after last week's sell off, and acquisition potential. HIBB has been a winner for us on the short side, but after last week's miss, guide down, and stock blow up, it's time to take this name off the Short list. There well better than a non-Zero chance that this company is taken out by the likes of JD Sports, or even Foot Locker. Trading at 8x a potentially doable earnings number and 6x EBITDA, it's drifting down to the take-out zone. This company is highly unlikely to be a stand-alone business over a 3-year time period. The athletic landscape is changing dramatically, and the retailers are usually the last to find out. It's due for a wave of consolidation and HIBB is the obvious target for us.
W (Wayfair) | Moving higher on Best Idea Short list. We like this stock a lot short side at $61. The operating environment is changing more rapidly than any sub-sector of retail over the past six months. Specifically, it’s getting worse. Yes, there's the real potential for the category to inflect in the back half of 2024, which is what the bulls point to. But we don't think they're appropriately discounting the risk to W with new competitors like BYON (which could alone make W comp down 10% over 12 months), SHEIN selling home furnishings (for details on our take on SHEIN's strategic direction – hitting a wall in apparel and building out to new categories like Home and Jewelry (and even power tools) while expanding its apparel demo to be higher in age – see our recent Black Book CLICK HERE). But the company is promising both growth AND margin over the next year, and the best we'll give them is one of those. We particularly think that the BYON risk here is massive – effective over the next two months. Based on what we know today, we'd cover this stock at $20-$30 (MAYBE), and it's now at $61. One of the juicer names with several catalysts to the downside, by way of BYON's brand-heat-building catalyst calendar of marketing and branding initiatives in the coming months at Overstock, Beyond, and to a lesser extent Zulily (higher end brand flash sale site – minimal overlap with Wayfair). We think what really makes this stock work are a) flat out misses and guide downs, and b) the business turning down while the Home sector starts to show signs of life in 2H.
MODG (TopGolf Callaway) | Covering short after 30% return over 6-months. We still think that this concept has major problems. But when we were asked by activist investors over the past month about the best names to engage (either playing nice in the sandbox or going flat out aggressive), MODG topped the list. These two businesses shouldn't be under the same roof. Management is sub par, and they don't know how to run the TopGolf Brand with accelerating ROI or unit economics, and at the same time we see mean reversion in the hardgoods/apparel side of the business (Callaway). Clipped a nice return here over a short time period, and don't want it to rally in our face if activists engage, or PE acquires the company outright.
EARNINGS PREVIEWS
NKE (Nike) | We recently moved this down to our Long Bias list, which is a big deal for us given how long we've been Long Nike, and our view that a management regime change (Donohoe gotta go), innovation ramp (new running platform in conjunction with the Olympics – after its share in running went from 20% to 7% in 5-years) is all absolutely critical to the story. But the reality is that this earnings algorithm this quarter on Thursday is going to be a mess. It's like this stock (about $100) wants to go up $20 or down $20, and based on the data we see, we're more inclined to think it goes down. We still think that Nike is more desperate for revenue today than it has been in 25 years. And the path of least resistance as an investor is to buy FL, which has massive torque in the model as Nike opens the spigot and flows more product through FL to generate top line growth. That's arguably only 2-4% growth to Nike in lifting FL from 50% of the store to 75% of the store over 2-years. But it's worth 20%-30% growth to FL on top of a 300-500bp gross margin lift. FL sits at #2 on our Best Idea Long List (after being short it for an eternity and going long at $16.50 two quarters ago – stock now at $22). Nike grows in multi-year bursts...and the next one (after a 5-year organizational reset) is a matter of time. We don't think a 50-year paradigm of '3-5 year burst growth' is over. Just delayed. We won't mind adding Nike back to best Idea Long list at a higher price – call it $120-$130 – bc the reality is once the next multi-year move begins, this name will be on it's way over $200. But for now, we're gonna give time, time. And maintain our view that Nike's desperation is ultimately bullish for FL.
Destination XL (DXLG) | Best Idea Long has been having a rough go lately. The company has had decelerating Pod 1 and Pod 2 trends over the last three quarters, with the Street expecting that to continue in the quarter reporting on Thursday. Last quarter the company missed top and bottom line and took the FY guidance down. The updated FY guide implied a guide down in Q4 revenues but not in EPS. Traffic visits for the DXL and Casual Male banners were negative in the quarter, so revenue is likely to be down again. The company is continuing to focus on the right buys and brand expansion with offering exclusives and being the top big and tall seller in the market. We went long this name due to the part of the market that it has cornered. Although lately it has been struggling with the execution of gaining and maintaining customers. Compares for the upcoming year are easier than this past year, so trends are likely to inflect as consumers look to refresh their spring and summer wardrobes. We’ll be looking for what the company plans on how to reinvigorate growth and its spending and cost savings initiatives (which are difficult to do at the same time – grow and cut costs). We're giving this position one more quarter. Our patience is running thin.
Signet Jewelers (SIG) | Stock has remained elevated despite weak revenue trends. We’ve been short this name since January of 2022 in the high $80s and it worked for us for a while dropping to the $50s in May of 2022 and fluctuated since, but its been hitting higher highs and higher lows as of the last few months – so Signal Strength has been going against us. The company guided to the upcoming quarter down but expecting bridal to begin a rebound in the quarter even though engagements will be below the prior year. The bridal cycles last about three-years, and the company said it is just at the beginning of one now. Can't confirm or deny that, and don't see how the company has the visibility, either. The company has been implementing cost savings measures and has been selling off some of its luxury watch showrooms over the last few quarters to help EBIT margin, which has fluctuated over the last six years and the street has it ending this year at 390bps above 2019 levels. Now the company has been taking price, but that’s partly getting offset by the increases in input costs, i.e. diamond prices have gone up since pre-pandemic. The company is trying to remain competitive in the industry, adding lab grown diamonds as well as new designs and designers to its offering at Jared. The struggle comes when consumers who are looking for on trend jewelry pieces don’t know that they can find them here because historically that’s not what these banners (Jared and Kay) were known for. If the company continues to spend to expand product offering, it also needs to spend on marketing and targeting the right consumers to come in to purchase those items. The traffic trend at Kay (the other banners are more mall based so we don’t get much data there) doesn’t look promising. We expect sales to continue to be negative YY. We still think this stock has about 40% downside from where it is today.
