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
Nike, Inc (NKE – $88.84). We're upping this name back to our Best Idea list after taking it off before the latest earnings report closer to $100. 5-to-1 upside/downside. We got the quarter right, but think that the risk/reward over a TREND and TAIL duration here is simply too good with the stock having sold off to the high $80s from $100+ before the quarter. Simply put, this is a 'things are so bad that it's good' kind of scenario. Take the negative sentiment on the name, as well as the fact that the company already de-risked FY25 (May) numbers, and our view that the consensus landed too low for the May quarter (Street is at $0.87, and we think Nike will do closer to a buck), and it paints a pretty attractive upside/downside from here. In the extreme unlikely scenario that Nike guides down FY25 AGAIN, we'd likely get a 'fire Donahoe' announcement along with it, which would probably lead to a mid-peak multiple on trough earnings...we think 25x $3.25, or a low $80s price. That's less than 10% downside from here. To the extent that the company beats, which we think it will, and actually comes out with a reacceleration in the top line on easy comps and share gain at wholesale as it turns on the spigot to the likes of FL and HIBB with more/better product, we could easily be looking at $4.50 in EPS power next year, which we think is good for a $135 stock. That's 50% upside, which is pretty material for a big cap bellwether like Nike. To get to the REAL bull case, that we think will be a reality after Donahoe is gone, we think you've got to underwrite $6-$7 in EPS power. We think Nike gets there in 3-5 years once the new innovation cycle kicks-in under a new CEO (even Heidi O'Neil is gonna be better than Donahoe), and the company goes through another burst of growth. On that front, you've gotta zoom out and look at how this company grows over time – all the way back to 1972, this company has material 'bursts' of growth that last 4-7 years, and then the organization resets and reorganizes for 2-4 years. This pretty much happens like clockwork, and we DON'T think that this paradigm as it relates to how Nike grows is broken. We're now at the tail end of one of these 'reset' periods, and when it's on an upswing, the Street invariably underestimates the magnitude and the duration of the earnings recovery. The big bull call is that this name trades at a high 20s multiple on $7 in EPS power. We don't think you have to believe that call today. Even on $4.50 in EPS in FY25 the upside/downside is nearly 5-to-1 with the stock trading in the high $80s.
Bath & Body Works (BBWI) | Shifting Higher On Best Ideas Long List. We added this to the Best Ideas Long list a month back, so far it’s tracking a few points ahead of the XRT, but with last week’s drop we’re shifting it higher. The ULTA conference commentary around a slowing category perhaps was a drag on BBWI this week. But the true category overlap here is small, and BBWI has a much easier comparison setup vs ULTA that is lapping strong demand and price increases last year in the beauty market. We actually think the relative growth trajectory, and relative valuations of BBWI and ULTA make for a good Long (BBWI) Short (ULTA) pair if that’s your game. But ultimately we think BBWI is a great absolute long in retail and think you can get to 50% to 75% upside over 1 to 2 years in a stable, high margin, high cash return model. We think business trends accelerate over the coming quarters of 2024 and the stock heads higher across durations. See BBWI elevator pitch link below, and image at the end of this note.
BBWI Best Idea Long Elevator Pitch
Three New Shorts This Week...(URBN, ANF, AEO) – 40%+ Downside
We're going all-in with our thesis on negative apparel deflation spreads taking the group down in 2H by adding URBN, ANF and AEO to our Short Bias list – we'll likely go Best Idea as our conviction grows on the timing of the call. But we think that all three companies are going further out on the risk curve with inventories to drive comp after a banner 2023, which adds material risk to the earnings equation in 2H24 and 2025.
On our 'deflation spreads' call, this is largely characterized by consumer prices rolling over (due to inventories building at the same time deflationary forces like SHEIN are more desperate for growth and are increasingly driving down price) at the same time import costs get less favorable. As the chart below shows, there have been periods of net inflation and deflation over the past cycle, and the relationship with apparel industry gross margins is nearly spot-on. Yes, ANF, AEO and URBN are all part of this bottom-up GM index. We're just coming off a period that is characterized by massive inflation, while brands like Anthropologie and Free People (URBN) and Abercrombie & Fitch (ANF) benefitted from significant brand heat and pricing power with fewer promotions. This took gross margin materially higher – which is simply unsustainable. 
Every brand is pitching a story to the Street that does not even include the possibility that this industry turns deflationary. In the end, we think that even with the rest of retail that might work in the face of a better Macro Quad setup, we're likely to see this space once again face-plant in 2H. We've seen this story evolve over the past 30-years (the industry became deflationary circa 1990 when the offshoring/outsourcing paradigm shift started in earnest with the elimination of the 'import quota' system). These brands think they can do no wrong, and they guide and forecast earnings looking in the rear-view mirror. But our contention is that these companies don't know that they've been in an aberrational unit-economic environment over the last two years, which came on the heels of two years of outsized growth in consumption. No, this is not a new normal, though the companies would like you to think otherwise.
We'd be short a basket of these names, including GPS, HMB, KSS, RL, OXM, VFC, M, JWN, URBN, ANF and AEO. If there's any winner (aside from the Consumer), it's probably the off-price channel. We're long TJX, and think that the stock still works even if the space turns deflationary, as it has in the past. Most notably the company will have more desperate brands catering to it and offering up better buys for TJX merchants. This likely benefits ROST as well. We'd be careful around BURL (which we're short), as we think it's basically the AAP (vs ORLY and AZO) of the off-price space – a broken asset that really can't be fixed without a substantial amount of capital – more than the company has committed or is in the current consensus expectations.
We're going to follow up with a Black Book on this Deflation Spread theme later this month. Stay tuned (and stay short apparel).
Covering Three Shorts This Week...(LOVE, FIGS, HZO)
Lovesac (LOVE) | Covering Best Idea Short After 74% Gain On Our Position. As we look at the setup for the print and coming quarters, the RoC looks to be getting less bad with visits growth leveling off, online interest down less, and relatively easy compares ahead. We also have had several home furnishings prints show rallies despite generally weak performance (RH, WSM) with the expectation of demand improvement over the next few Qs. This is a single product company (sactionals – 86% of sales) exposed to the depressed home turnover environment, which made new LTM lows in EHS volume last month. LOVE is investing to grow, with very weak output on the revenue and incremental margin flow. LOVE layered on ~$135mm in implied debt from leases, carrying a 7.4 year weighted average lease duration. That seems like a lot of operational risk/inflexibility for a single product company with cyclical housing risk. We have earnings power over the next couple of years around $1.50 to $1.80 (street at $2.15 to $3), and we’ll give this a low teens type multiple, meaning a stock worth around $15 to $20 vs current $23.84. So is the stock still headed lower from here? We'd argue that it should, but wouldn't be surprised to see it rally as numbers are perceived to be hitting a trough in the face of better home sales data.
Figs, Inc (FIGS). Covering this name after 55% gain, as the upside/downside from here looks to be more balanced. We shorted FIGS at $11 based on our view that the company's competitive moat was far smaller than management was pitching, which would lead to lower top line growth and increased gross margin pressure due to competition. Now it sits sub-$5, and may very well remain there forever. Over the past 18 months, current-year estimates have come down by about 80% to about break-even, which we think is close to being right. Make no mistake, this stock is still wildly expensive on earnings and cash flow, but at 1.5x EV/Sales will start to look cheap to some people, particularly given a relatively strong balance sheet. Maybe we take a swing at this name if it hits $3 – which is the price we told FIGS management it was worth when it was trading above $10 (and they flipped).
MarineMax (HZO). We had a more modest 35% win on HZO, but we're covering at $30 (shorted it at $45), as we think that earnings expectations here are nearing the end of the negative revision cycle. In early 2023, the Street was looking for 2024 earnings to come in at $7 per share, and now numbers are sitting at $3.33. Could there be one more guide-down? Perhaps, as every indicator we see in the boating world is that demand still looks weak. The K-shaped recovery we're seeing in the broader economy should disproportionately help the high end, which might give HZO a lift with its higher priced products. At a minimum, if we see another downward revision, we could very well see the kind of positive reaction we're seeing in other cyclical names like RH and FND where the Street looks right through what it thinks is the last guide-down. This stock is relatively cheap – trading at around 5x a doable TAIL EBITDA number. We're not crazy about only netting 35% on this one (we target much more), but we'll take the win and look for better torque elsewhere.
CarMax (KMX) | Bearish into the Print on Used Auto and Financing Setup. KMX is roughly flat since we shorted it in December ’23 with the XRT up 10%. It's worked for us in relative terms, but we don't like relative – we're all about absolute performance, and still think KMX can work short side. We still think KMX’s near term auto finance risk with higher (for longer) rates and rising delinquencies is too great to want to own and that all auto retailers with heavy used exposure will be greatly negatively impacted by continued falling prices. While we haven’t seen a used auto pricing ‘Black Swan” event yet, in which prices fall further and faster than anyone expects, we have seen prices continue to come down across all brands and in the wholesale marketplace. We expect this to continue, but with overall affordability remaining a challenge for demand. As for KMX specifically, the stock is back to 23X earnings, a hefty premium to other dealers across the space. While we see KMX as a long term share gainer once prices fully reset, in the short-term there is still too much earnings risk, especially given that subprime auto lending hasn’t seen a persistent inflationary environment and that the credit rating agencies were likely a bit too generous in their scoring over the past few years with consumer credit quality at ATHs after a period of zero rates and low inflation.
