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
Floor & Decor (FND) | Taking Higher On The Best Ideas Short List. We detailed out the Short Thesis last week with a deep dive into the company’s markets and store economics. On the specifics of the analysis, we segmented FND store adds by year, by market/MSA, and looked at the competitive landscape and consumer spending potential on the category at a micro level to see how each cohort is performing. What it suggests is that the recent margin hit at FND is not just cyclical, but also a secular development as the company moves into more competitive markets with lower spending propensity. Ultimately at 50x earnings, the market is underwriting a pretty massive terminal value, and a material ramp in the P&L when the cycle turns. We think what will cause this stock to materially underperform and be re-rated when earnings fail to recover at the rate the underlying cycle suggests. The analysis behind our deck is using tools and data that we don't think can be replicated by anyone else on the Street. It's worth taking a look.
Video Replay Link: CLICK HERE
Five Below (FIVE) | Removing From Short List With Sales Slowdown and Employee Related SG&A Risks Now Known. We added FIVE to our Short list in January 2023 noting two elements to the bear thesis… One being the risk to comp trends as the consumer feels discretionary wallet pressure, two being the overly efficient store profits with employees per store running well below normal levels. Comps held in a bit better than we expected at +2.8%, though sales still came in a bit below the expectation at that time for 2023. The bigger catalyst has been the employee investment needed, which initially manifested itself in elevated shrink, and now higher SG&A for the company to stave off shrink getting worse. As we look at the setup now, comp expectations are low at just +1.5% for the year, and margins are expected to be down. The visits look to be trending better for the early part of 2024, suggesting we could see some rate of change improvement, particularly when you add the ASP lift potential of continued expansion of Five Beyond (above $5 items). Street is expecting just 12% EPS growth on 14% unit growth and it is putting a near trough 24x P/E on FIVE, and the EV/sales is about in line with 6 year lows. When we went short over a year ago we said we could be interested in the name long side about 30% lower, we got the price move, now we’ll look for the right fundamental setup to potentially get long.
Helen Of Troy (HELE) | Bearish on the Business Into Print, But Guidance Is a Question Mark. We remain bearish HELE into the print (Wednesday premarket) as we think business trends are unlikely to be improving. We suspect we’ll see an inline print, which would be sales down about 1.5% on top of a much easier compare of -17% YY. We're expecting yet another quarter of horrible earnings quality. Our Short call here is that we’ll see persistent share losses and negative growth as the company milks its brands for margin and doesn’t invest in growth. Hydro Flask continues to lose relevance driving losses of shelf space and the need for persistent promotions to drive velocity. We continue to see it in stock at discount stores like Home Goods. Beauty as a category has seen a big slowdown with recent comments from ULTA being bearish on demand into early spring, suggesting HELE’s beauty assets will see demand pressure as well. The tricky part to gauge here is guidance, as this is the first earnings print since the prior CEO stepped down. The new CEO might want to keep the same ‘promise growth’ and underdeliver strategy of the prior leader, or she might want to set a beatable bar, which would mean a material guide down of earnings. Perhaps it’s the CFO’s call, which would favor a higher bar and a perhaps a number perceived to be bullish on the headline. Ultimately, we think there is 10% to 20% downside risk to the adjusted earnings expectations for this year, which we’d remind everyone adds back SBC and excessive one-time adjustments, so the “real” earnings as we’d consider is more like $6 vs the adjusted street of nearly $10. With the negative growth and higher rates, we think this deserves an FCF yield in the mid-teens, suggesting a stock 50% below current levels. The short has been working in 2024 with YTD down 17% vs the XRT down 2%, that underperformance is perhaps a risk into the event… but we think this is one of the better shorts in retail for the next 1-2 years.
O’Reilly Auto Parts (ORLY) | Still Bullish Into 1Q Print. Reports 1Q Wednesday after market close. We added ORLY to the Long list (along with AZO) on January 6th of this year, and the call so far has done well up 18% with the XRT +2% (since Jan 6). The thesis was predicated on relatively beatable numbers, with compounding tailwinds to demand around the dynamics of the new/used auto market. Reports from Cox Automotive suggested that affordability is pressuring the new car SAAR (i.e. addressable market in 2024), arguing the top 20% of consumers are the only buyers today. Affordability remains a big problem with rates ticking up and prices not dropping fast enough. A shrinking new car market means a growing auto maintenance market as consumers have to invest in their current vehicles. Meanwhile, the overall car parc was already on an accelerated aging path given the low volumes of new car sales over the last few years. Numbers came up slightly after the solid 4Q print and the compare is somewhat tougher here for 1Q. After 1Q, growth compares start to ease, and we think ORLY can put up comps in the 6% to 7% range in 2024 vs the street expecting 4%. ORLY also just entered a new market with an acquisition in Canada that should drive further top line growth as it opens doors up north. Overall we think that gets you to strong sales and earnings growth, and about 10% upside potential to 2024 EPS which would put the stock at a reasonable (for ORLY) 20x our PE, where there is likely some multiple upside if numbers are marching up.
Tractor Supply Co. (TSCO) | Still Bearish On Consumables Deflation Risk And Home Retail Demand Weakness. Reports Thursday pre-market. We added TSCO to our Short Bias list back before our October Home Improvement Deep Dive as we expected TSCO to fall short of comp expectations over the proceeding 12 to 18 months. The company subsequently missed comps for 3Q and took down full year revenue. The stock has since rallied despite pressure on home retail from rates and low turnover. Part of TSCO demand is tied to home ‘improvement’, part is consumable, and part is mixed discretionary. We think there is potential for pressure on all 3 of those. We have been clear about how we think home turnover (EHS at new lows as of this last week’s report) will pressure big ticket home demand. On the consumables side there continues to be deflation in commodities related to the consumable categories that TSCO sells, and on the discretionary side the return of inflation means less money remaining for discretionary spending at Tractor Supply. TSCO has done an impressive job winning share over the last 3 to 5 years, and that share opportunity might be the case over the long term, but we think the setup for the stock remains risk to the downside from here. Placer visit trends have been choppy, though a positive for TSCO is relative easy compares on the topline through 2024. We expect to see both sales productivity and margin reversion in the coming quarters. That gets us to about 10% in earnings risk and we think a multiple heading toward high teens vs currently sitting near peak at around 24x, that means 25% to 35% downside for the stock.
Kering (KER-FR) | Going To Have A Bleak Print This Week. Kering (Short Bias) came out about a month ago and guided down Q1 revenue to down 10%, so not looking for any major surprises this week. This guidedown was due to a greater than expected sales drop at Gucci, especially in APAC. This past week we saw LVMH fashion & leather goods put up a deceleration from +9% to +2%, with management cautious around the rest of the year. With some overall softness in the luxury space, Kering isn’t positioned to be any different. Since the company did come out and guide down, we don’t expect the Q1 numbers to really differ from what management said last month, but we expect incremental commentary around the full year to be cautious. In its announcement last month, the company said that the upcoming Gucci collection has already started to be received positively, but regardless it guided to Gucci down 20% in Q1. (We're yet to hear any management team say something like "Our new collection looks terrible."). Reminder Gucci is about 50% of revenues but upwards of 70% of EBIT, so any big hit to Gucci is a big hit to the company as a whole. We think that the Gucci brand is in a period of reset and it will take more than a quarter or two to fix. Revenues could be down for the remainder of year. Let’s not forget we also saw revenue growth at two of the other big houses, YSL and Bottega Veneta, that had been seeing strong growth weaken last quarter. We expect the rest of the year to be tough for Kering as it struggles with Gucci, other brands are slowing, and the luxury space is experiencing softness. Kering is on our Short Bias list as our short play in luxury.
Auto Retail Earnings in Focus. Punchline – Still Short. Since we did our Black Book (Here) and got short Auto Retail in aggregate last November, the shorts have done 'fine' (notably LAD, KMX, & SAH) — but we are still waiting for the real shoe to drop. Short Bias name CarMax (KMX), which reported on the 11th, presented a few potential warning signs and implications for the other Auto Retailers, despite an overall acceleration in the business. Shorter term, KMX noted slight market share decline while holding margin, so other heavy used players probably seeing stronger units on lower price in Q1. KMX highlighted two major periods of steep (and fast) depreciation, with one into year end, so potential for 1Q ASPs to see a big decline (which is what we are seeing in the Manheim and CarGurus data). Despite this, KMX noted continued demand pressure via low affordability, with monthly payments still ~$530 vs $400 historically on ASP of ~$26k vs $20k historical. People are interested in buying but are not willing to pull the trigger given the sticker shock. The space needs rates to come down or prices to fall to open up affordability, but the former looks unlikely with the current trajectory of inflation. KMX noted that 1Q comps (KMX is off cycle with the other retailers) are down MSD despite a positive tax refund dynamic and easy compares. Also, tightened lending standards at CAF remain a headwind (though their auto finance segment did accelerate in 4Q) for KMX and the rest of the industry in general. Shorter term there seems to be room for volumes to come in stronger than last quarter and that looks to be what the street is expecting. Price, on the other hand, should continue to go down, bringing GPUs with it. Longer term, KMX pushed out their business targets, which put a damper on growth expectation for the space in aggregate. The other players do not generally provide explicit guidance, though, so a double digit cut to stock prices on a negative print, like in the case of KMX, seems unlikely for the others. 2024 was supposed to be the year of normalization for auto retail, yet we don’t think affordability can improve significantly enough, especially with a higher for longer rate dynamic. We are staying net short Auto Retail as we expect prices to continue to fall and pressure unit margins. CVNA and LAD are on our Best Idea Short list, and KMX and SAH on our Short Bias list. We remain long GPI and PAG as pair-trades/hedges against our short Auto Retail thesis due to their higher quality customer mix, leading parts and services offering, and healthier balance sheets.
