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
RH (RH – Best Idea Long) | Expect fireworks from RH's EPS report on Wed after market close. Up front, we still have high conviction that this name is headed over $1,000 over a TAIL duration. But looking over a TRADE and TREND duration, this is a much more difficult call with the stock re-approaching $300. Do we think RH will miss the quarter? No. We're modeling a beat, but that's likely to come from margins, not top line. In order for this stock to work, like REALLY work, we need an acceleration in the top line, and we're unlikely to get that this quarter. We're seeing store visits look less bad, which is a positive, and we're seeing an uptick in sales of homes over $1mm – also a big plus. But both those will likely show up in recognized revenue a quarter or two out. Two quarters ago, Friedman called for two business inflections in 2024 (just thinking out loud, isn't a double inflection a bad thing? – up and then back down again?). Nonetheless we get what he meant...that sales would turn up once the new assortment hits, and then turn up again when housing improves. So far, neither inflection is apparent in the data, nor will it be in this week's results. At this point, we'll take a single inflection – never mind a double.
That leads us to the biggest opportunity, and risk, for the P&L and the stock. We think that there's a 60-70% chance that Friedman cuts price by 10-20% across the board in one of the next two quarters. He's done it before, with Contemporary, so there's a precedent for such a move. When Contemporary units weren't moving at a price 25% above the core RH aesthetic, GF immediately lowered price, and the product started moving. Keep in mind that this company raised price 40% during the pandemic. Giving back half of that to get volume to start moving higher is absolutely not out of the question. What RH wants to avoid is both a) a stagnant top line, and b) risk of inventories rising and having to discount product – like it did late last year. Do yourself a favor and ask WSM and ARHS management what would happen to their respective businesses if RH made this move...any answer other than "we'd have to more aggressively promote" would be a flat-out lie.
The next key consideration this quarter is Europe. The company has stores opened in England, Munich, Dusseldorf, and now Brussels. The last three are too young to have any real store or market share metrics behind them. But England has been open for nine months. The company NEEDS to give some quantification as to how this market is trending. If not, then people will assume that it's going poorly. To be 100% clear, we think RH is going to crush it in Europe, and have been impressed with the cadence of store openings thus far. The risk in Europe isn't whether or not it works, it's how much capital it takes to MAKE it work. The company has gotta give some real numbers here.
Bottom line here is that we still think that this stock is going to be a MASSIVE winner over 3-years. We think the company earns 2x the consensus $22 estimate in FY27. Yes, even with a a price cut we can get to 20%+ margins (vs 13% today). $50 in EPS, which is what we're underwriting, should get a 20-30x multiple for a company with RH's growth, high-end brand, competitive moat, and unparalleled square footage and market share growth when compared to other retailers. That gets to a stock well over $1,000. But tactically, this name could be up or down $50 on the print. We don't like 1 to 1 odds. We'd rather be buyers on a sell-off, or better yet, buy it at $350-$400 once we get confirmation about Europe or a turn in the US. A ramp in volume and comp would lead to outsized cash flow, which would also make this one of the best de-levering stories in retail. Bottom line, if you own it, trim SOME, then be prepared to add back after the event.
Gap Inc (GPS) | Shifting Higher On Best Ideas Short List. We get it, the stock only wants to go up given bulls embracing the new CEO’s message and cost cutting story. Margins have come in ahead while OId Navy has improved and Gap has a moment riding the ’20 years ago’ brand halo from the likes of Abercrombie and AE. When we look at the competitive set and earnings risk, we can’t buy into the bull case here. SHEIN has brands like Gap and Old Navy in its crosshairs, we think margins across apparel will see pressure over the next 12 to 24 months. Athleta is facing a new wave of yoga brands that look to be chipping away at even LULU’s growth algorithm. Gap has been a store closure and cost cutting story for over two decades… cost cuts won’t fix this model – they'll just perpetuate the revenue pressure. And credit we think is a big risk, upwards of 35% to 50% of EBIT for the company, while bad debt has been rising and late fee regulation presents a big risk in late 2024 into 2025. We underwrite long-term earnings power here below $1.00, street looking for over $1.70. Let's be generous and give this a 10x multiple on the high end and you get to a $5 to $10 stock. Today at $28, the buy side is underwriting an earnings number above $2.00. Maybe GPS hits that this year – perhaps by accident. But it is absolutely not sustainable. When you can short a junky name like GPS at peak multiples on peak earnings, history shows that it's generally safe to take that shot. Trough on trough will ultimately be in play.
Kohl’s (KSS) | Adding to Short List. Kohl’s is in a tough spot. For a decade now the company has been trying new strategies to find ways to win younger consumers. There was tender agnostic rewards (Yes 2 You), ‘younger’ brand launches, the athletic push, Amazon Returns, and now Sephoras in store. We thought Sephora had the best opportunity to drive new engagement and some earnings upside, which it looks like it is doing within the beauty section, but it is not doing much for the rest of the store. Meanwhile the capital investment that has been required to launch the Kohl’s Sephoras has been immense. Sephora did $1.4bn in revenue for KSS last year, up over 70% YY. That’s great, but given the revenue decline last year for the total company, it implies the rest of the store was down about 7%, and that is with 53rd week help and lapping that ‘rest of the store’ dropping about 10% the year prior. KSS can’t get new customers to shop the rest of the store. Given the new beauty section likely is decently profitable, we can comfortably say that without Sephora, or the Capital One credit card profit sharing, KSS would be losing money as an apparel/home retailer. On the credit point, we think the company has some bad debt risk to come, we see a CFPB late fee max change as a material credit headwind albeit starting in late 2024 should it make through the election cycle, and we think the company is being overly aggressive with its estimated $250 to $300mm in incremental credit revenue from its co-branded initiative. So, earnings look too high over the next 2 to 3 years, and the stock carries a legit multiple at 11x PE. The stock is yielding 7.6%, which we think means a dividend cut is on the horizon given capex investments still needed for the last stage of the Sephora rollout. We think TAIL earnings are headed sub $2 while the street is at $2.80. All in that gives us downside to the mid to high teens vs the stock at $26.37.
Signet (SIG) | Shifting Lower On Short Bias List. We moved SIG higher on our Short list back on December 10th with the stock around $98. Since then the sock is down 6% with the XRT up 17%. We’ve gotten a negative earnings revision catalyst, and now as we look at the rate of change of visits and credit card sales, trends look to be getting less bad with this still being an optically ‘cheap’ stock at 9x earnings. Tack on the more bullish macro market setup for consumer discretionary and we’ll risk manage this one over the near term. This stock is built to be cheap though. We think it is over-earning and has one of the weaker strategic/operational positionings in brick and mortar retail. Our earnings outlook hasn’t changed, TAIL earnings are $8 to $9, and we think a fair multiple here is around high single digits (7 to 9x). That puts a fair value on the stock around mid-60s to mid-70s, call it another 15% to 25% downside risk… just a less attractive risk/reward than 3 months back with the earnings catalyst behind us.
G-III Apparel (GIII) | Shifting Higher on Short Bias List. The short thesis here is simple, G-III historically held two core licenses with PVH to make Calvin Klein and Tommy Hilfiger Womenswear, but in 2023 PVH announced it was taking back both. That means, in 2025, GIII is losing its most valuable assets (by far) and is left with dying department store brands like Lagerfeld, Bass, Andrew Marc, and Halston. In its final year with the two brands, we think GIII is likely to milk them for margin and underinvest—so sales are likely to suffer whereas margins may hold strong. Over a TAIL duration the street has GIII earning ~$3.50, whereas we come out closer to $1.75. There's no reason why a sub-par dying portfolio like what GIII shouldn't trade at a mid-high single digit multiple – 10x under a bullish case scenario. That gets us to a stock below $20 vs $27.36 today. The terminal value here is nothing like what people are modeling currently. Time is on your side with this short, as the company is unlikely to find new business to replace these core revenue/profit driving licenses. This stock is starting to crack and we think it is headed a LOT lower.
GameStop (GME) | Market Expectations Look Low Into Print, Don’t Press. We shifted GME off of our Best Ideas Short list with the stock lower back in November. Ahead of this print, visits trends are looking less bad, but it looks like sales are underperforming the visits trend with February slowing. We’re still short here, but the event to us doesn’t look like a negative catalyst event given the market likely knows that business has been ugly. The company doesn’t guide or give an material detail on business outside of the PR/10-Q numbers and you always have the risk some odd Ryan Cohen announcement or action that gets the meme stockers excited. We continue to see downside to around $10 for GME but wouldn’t be pressing into this event.
Birkenstock (BIRK) | Lock-up Period Ending. Little refresher, this IPO’d in October at $47 and we added to the short bias right away with the stock opening at $41. A few months later we upped to a Best Idea Short. The stock is now back up around its IPO price, but has traded up and down over the last 5 months. We don’t think that this 250-year-old company is going away, we just think that it IPO’d at peak growth and with the fashion trends working in its favor. We wouldn't touch it long side until it trades into the low 30s, which will likely happen if and when the company fails to comp a ridiculously high price/ASP-driven comp next year. The most recent quarter we saw slowing revenue trends and an implied slowdown for the rest of the year. The lock-up period is coming to an end on April 8th and it's only natural to suspect that there will be increased selling pressure once we hit that deadline. Especially since the stock is nearing its post-IPO peak of $52. Tactically, we're looking to get heavier here in 2H when it faces its IPO comp – when business was as strong as its been in the history of the company.
Oxford Industries (OXM) | Could Be A Tough Quarter. Looking at the credit card data below, the company seems to have started the quarter off okay but that rapidly decelerated to flat to negative trends. But once the trends are chartable in a note like this, it's safe to say that's in the stock already. The company will probably come out on the call and say that trends for the current quarter are improving but we'd note that overall fashion trends are not moving in favor of this brand. We have been short this name since December of 2021 at $102. It's now at $109, so we're hardly waiving the victory flag here. The company was a beneficiary of the net migrations to warmer climates impacting demand trends at Tommy Bahama, Lily Pulitzer, and Johnny Was. But over the last few quarters we have seen revenue growth trends decelerate and we expect trends to remain weak over the next few quarters – particularly as the category becomes deflationary again, which has already started, and we expect to accelerate in 2H, which is very bearish for margins across apparel, including OXM. Keep in mind that this company is still putting up gross margins about 500bp above pre-pandemic levels. A pandemic winner with meaningful GM risk.
