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Nike (NKE) | Moving NKE higher on our Best Idea List – just two weeks after getting positive on the name again. Near term there's $10 downside, and $40 upside. TAIL Double. We're hosting a Black Book in two weeks to discuss our full thesis, but we like this name on a TRADE, TREND and TAIL duration. Over the near term, we like where the Street landed for the quarter after the 3Q (Feb) results. The Street is sitting at $0.87, and we think that Nike comes in better than a buck. Most of the difference between our numbers and the Street's is on the margin line, which we don't love. But a beat is a beat, and with sentiment so poor on Nike, we'll take it. Over an intermediate (TREND) duration, we think that both Sales and Margins will accelerate, which is due in large part to better product flow through the wholesale channel and should take Nike through the end of this calendar year. Note that FL is higher than NKE on our idea list, as we think that this is one of those rare periods where the balance of power is shifting to the wholesale channel as Nike buys back shelf space via better/more exclusive product, more favorable retailer margins, and investing in the retail experience by paying up for retail fixturing. After this initial 2-3 quarters of investing in its wholesale partners, we think that we're going to see new platform launches, which will allow Nike to earn back the shelf space that it's buying today. That's when the top line organically accelerates at Nike, the company earns $5 per share vs $3.50 today, and the narrative starts to shift to $6-$7 in EPS power. That seems like a pipe dream today, but this is how Nike grows. Make no mistake, this company is massively cyclical. Not as economically cyclical as some would like to believe (though that's definitely a factor), but it grows in its own 'super cycles' over time. There have been upwards of 7 of them (that we can identify) since 1972, and we think we're at the early stages of another one today. The company goes on a massive burst of new growth, which lasts for 3-5 years, then it peters out, reorganizes based on where the consumer is headed, and that period lasts another 3-5 years. We're now in year 5 of the latest re-set. And Donahoe (CEO) is on the ropes. As much as we think that he should have fired himself in the latest round of layoffs, he's not going to want to retire next year at the mandatory retirement age on a sour note. The company will almost certainly have launched a new platform by then (think Shox, Free, Presto, Flyknit, Air) as opposed to simply re-launching technology and innovations that have already been commercialized (like it's doing now with Air Max DN, which we think is kind of a joke). If we're wrong, and the company misses numbers or tempers guidance over the next 2-3 quarters, and we think it will cost Donahoe his job. We also can't and won't rule out someone like Mark Parker or Eric Sprunk coming back to the company to be interim CEO for a 2-3-year time frame to 'fix' the company and re-ignite growth. Either way, we think that Nike presents a solid risk/reward at current levels. As growth re-accelerates and we get a $120-$130 stock within 6-9 months, on its way to the BIG call, which is $6-$7 in EPS, which is good for a $180-$200 stock over 3-years. So we've got downside of about ten bucks, and upside of 2x for a big cap premium brand with an absolutely stellar balance sheet. We think this one is a big call here.
Capri | Higher On Our Best Idea List – Stock Is Close To A Level We'd Own It Even If The TPR Deal #FAILS. CPRI was already trading well below the $57 TPR take-out price, but has taken a massive nosedive over the past two weeks to $41. This name is in the hand of risk-arbs right now – not a game we usually play. Handicapping whether deals go through is what these guys do for a living, and we have to accept the reality that their information is probably better than ours. But CPRI is now nearly at the point where we can justify owning the stock even if the deal does NOT go through. Our price on an all out #fail here is about $35. If we say there's a 50% chance of the deal happening (we still think it's higher than that) the stock is meaningfully closer to the 'buy the standalone CPRI anyway' price than it is the take-out price. Again, risk-arb is not really where we live. But near $40, we're comfortable making a lot more noise on this name – as you can make money over a TAIL duration on a standalone CPRI, with a call option on this deal going through. Keep in mind that the company is cleaning up wholesale distribution – both shrinking excess doors and improving margins – while the company is shrouded under the TPR take-out noise. So we think it emerges a stronger and better company if the deal does, in fact, fall through.
Sleep Number (SNBR) | New Long Idea, TAIL Triple. Some might view us going long SNBR as a sign of the apocalypse, but we simply view it as a sign of our process. We were short this name several years ago at about $100, when earnings expectations were at a nosebleed $7-$8 per share, and we were just coming off a period of excess consumption in mattresses (two years of 10% growth in consumption) and we said that we were going to see a major dropoff in demand and earnings. That came to fruition, and SNBR blew up no fewer than six times, and now earnings expectations for the year are for a loss – simply a massive guide-down cycle. We got off this short a little early – at about $25 (75% return), but the stock has gotten cut in half since then. Now it's sitting at $13, and we think that expectations have overshot to the downside at the same time we're seeing signs that higher-end consumer durables (a SNBR mattress costs $5k+) have finished the bottoming process. Leverage (both operational and financial) hurt this company on the downside, but we think the same leverage works on the upside. We think the company will be profitable this year to the tune of about $0.75 per share, with the Street looking for a loss of about ($0.20). By 2026, we have earnings of $3.87 vs the Street at $1.30, and a year later (TAIL) we get to nearly $6 per share. Over 12 months, as the buy side starts to look at what recovery earnings look like here in the next cycle, we think we're going to see this name trade at 15x-20x $2 per share in earnings, which is good for a $35 stock. Looking at TAIL earnings power. we'd put a 10x multiple on a $6 in earnings, or a $60 stock. Today, the company has a pitiful $282mm market cap, vs over $3bn at the peak. We don't think it sees peak again anytime soon, but with the stock at $13, that's hardly what you have to believe. This might be a junky company where management lost all its credibility in forecasting earnings over the past two years, but we think the P&L will be explosive starting in the back half of 2024.
Carter's (CRI) | Removing from our Long list. We were never wed to this idea, and over the past two weeks have round-tripped whatever gains we netted long side. At this level, we need to either up it in the queue, or punt it from our list entirely. We're punting. While 40% of CRI's business is very defendable – babywear and sleepwear – the reality is that 60% of its business is a commodity. The piece we're referring to is Playwear. Unlike the baby and sleep parts of its business, where there is a clear competitive moat, in the playwear piece any such moat is nonexistent. This piece, like the rest of the apparel market, benefitted from a generational tailwind over the last two years due to the hyper-inflationary cycle the industry has seen. And CRI should get hurt just as much as the other basic apparel companies we have on our short list – like GPS, HMB, KSS (below) and others. Assuming these 'inflation spreads' go against the industry, that takes away any margin upside we were otherwise baking-in to the CRI model as the rate of change in the birthrate turns more favorable (from declining over a decade to flat). Over 12-months, there's just as good a chance that this stock sees $60 as $90 (currently at $73). Moving on to better long ideas.
Kohl's (KSS) | Upping to Best Idea Short List. KSS is at the epicenter of the Apparel Deflation call we've been hammering over the past month. We added the name back to our short list after going toe to toe with activists when they called for a takeout when the stock was at $60. Now it's at $23, and the reality is that it can see $10. The consensus is underwriting $2.50 in earnings, suggesting about a 9x multiple for KSS. What most people don't even realize is that over 100% of EBIT comes from credit card income. So yes, the company is losing money on those UnderArmour shirts and faux cashmere sweaters. The latest growth initiative is adding Sephora shops, which is definitely working (and one of the reasons we're short ULTA – as the footprint and locations overlap by about 80%), but we think that only about 20% of Kohl's/Sephora shoppers are extending their trip beyond beauty and are picking up items in the Kohl's store. Since 2022, Sephora has ADDED about $1.7bn in revenue at Kohl's stores, which suggests that organic apparel and home sales are down about 15%. And this is when the industry was going through hyper-inflation and both sales and margins saw a big lift. What happens when that tailwind goes away, which we're absolutely certain is happening today? Bad news for KSS. The company is investing heavily in these Sephora shops, and a dividend cut is absolutely not out of the question here if the model pans out like we think it will. Lastly, there's no real estate play here. To be clear, even Macy's isn't a real estate play, as there's no liquid market for a large portfolio of mall based anchor tenant space. And that's the 'oceanfront property' of retail real estate. If there's no market for Macy's, then there's absolutely no market for Kohl's stores, which are almost all based in strip malls (and have no real estate optionality). Maybe if this stock gets beaten up enough, someone will buy the company outright, knock down the owned stores and put up condos. But's something we have to worry about when this is a $5 stock, not when it's above $20.
Adidas (ADS-DE/ADDYY) | Moving Higher On Best Idea Short List. The Long NKE Short ADS Pair Should Work Big Across Durations. Since Feb alone, ADS is up 20% while Nike is down 15%. This is happening when Nike is at trough sentiment and ADS is at peak. While HOKA (DECK) and ON (ONON), both Best Idea Shorts, have gained 13 points of share in Running over the past 4-years at Nike's expense (Nike share went from 20% to 7%), it's Adidas that gained share in lifestyle shoes – in large part due to the explosion of the Samba and Gazelle, which won out over the Air Force 1 and other Nike classics at the same time. These three brands all have a LOT to lose as Nike reaccelerates its top line. We really scratch our heads on what in the world the consensus is thinking about Adidas here. The company came out intra-quarter and guided this year's EBIT to miss the $1.2bn consensus and to come in at $500mm. Will the company beat $500mm? Probably. The real number is probably closer to $750mm (it needs to be better, consensus is $863mm), but this name is trading at a peak 31x p/e. In addition, the Street is looking for EBIT to go to DOUBLE next year to $1.7bn, and then go up to $3bn by FY27. If we're right on our Nike call, ADS will miss these numbers massively...likely not putting up EBIT dollars at even half of the consensus level. This name is trading today at better than 60x underlying sustainable earnings power – which is something we'll short any day of the week.
