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 ( NKE) | Moving Nike to the #1 Spot on our Best Idea Long List. We're presenting a Black Book this Wednesday at 12:30ET on Nike and its entire ecosystem (including retailers and competitors). For the presentation Live Video Link CLICK HERE. But the punchline is that we think that the business model is inflecting, even if not for the right reasons. By that we mean that Nike is being incredibly disruptive right now as it's using its cost savings from the workforce reduction and is buying back the market share it walked away from at wholesale over the past 4-years. To be clear, Nike absolutely has to EARN that space back over a 9-12 month time frame with next-level product, but for now it's investing in better margins for retailers, paying for co-op marketing, and buying fixtures in retail stores to recapture share. Importantly, the costs to do so are already embedded in guidance for FY25 (May), but the revenue accretion is not. We think that Nike will be sitting at $120-$130 over 12 months, at which time people will be looking at the model very differently. Nobody believes Nike can organically grow revenue today, but we think it can, and will outline why in our deck on Wednesday. We think that 12-months out, with the stock at $120-$130, people will begin to underwrite what we think is true, that under a new management team, Nike is just starting the next cycle of growth, which will put $6.50-$7.00 per share in earnings in play. That's good for a $200 stock. We don't think you have to make part 2 of that call to get paid today, but that's where we think the narrative is ultimately headed.
RH (RH) | Moving up to the #2 slot on our Best Idea Long list. We came out hyper-critical of the company (and management) after that last conference call when the stock rallied to $350 on a terrible print, when we took this name down a few notches on our Long list. But the reality is that with the stock now under $250, we think the risk/reward is simply too good. What we don't like is that the name largely trades like an ultra-volatile rate proxy. But we think the company has finally de-risked the upcoming year's earnings expectations. We still think that there's a very good chance that RH puts in place a broad-based price cut to deliver on the demand expectations it set last conf call (keeping in mind that RH took up prices by 40% during the pandemic – and now likely needs to give some of that back). If we're right on that, then WSM is the obvious short as it will need to begin discounting again to stay competitive, something that the market today isn't baking in as even a possibility. While that's not in margin expectations for WSM, our math suggests that it is for RH. Mind you that 2024 expectations have come down from $30 2-years ago to $9ps today. We think the water torture of downward revisions is finally done, and that we're in an upward revision cycle starting this quarter. Over a TAIL duration, we still build to $40-$50 in EPS power. If we're right on the model, we get to a stock over $1,000 over 3-4 years, or a 4-bagger vs where it is today.
Tapestry (TPR) | Upping TPR To A Best Idea Long. Simply put, at $40, we don't think that the Street really gets the decision tree here, and that you win regardless of whether or not the FTC succeeds in blocking this deal. If the deal goes through, which the market is currently discounting will NOT happen, as evidenced by CPRI trading at $35.50 with the take out price at $57, then the merged entity will be one of the biggest and best de-levering stories we'll have seen in a while. We still think there's a better chance of this deal going through than the market thinks. But if it is successfully blocked, then TPR, which raised $6bn in cash to get the transaction done, will have a massive excess cash problem. That problem will likely be met with a HUGE repurchase solution. And that comes at a time when the core Coach business (90% of TPR cash flow) is performing very well, and the stock is trading at a Kohl's multiple – which is kind of a joke.
A note on CPRI – still a Best Idea long. Though we like the upside/downside better on TPR here, we still really like the risk/reward on CPRI at $35.50. It's trading today at the same price as before the deal was announced, when the business and competitive landscape were arguably not as good as they are today. We liked CPRI as a stand alone business before the deal was announced, and absolutely nothing has changed in that regard.
Abercrombie & Fitch (ANF) | Upping to Best Idea Short List. We really like the short call on ANF here at $122. This is part an idiosyncratic company call, and part an industry call. But the marriage of the two, we think, is a winner short side. The simple truth is that after about 8-10-years as a dormant brand, ANF reinvented itself and captured the teen customer it had been selling to a decade ago, and is now selling that same customer (now in their mid-20s) workwear and going-out clothes. Really a great job by this management team – as we VERY rarely see brands reinvent themselves. The bull case here is that the same management team will do something similar with Hollister, which accounts for about 50% of the store base – though we don't think this company sees lightning strike twice. On the core Abercrombie concept, what's undeniable is that the company took meaningful price over the last two years. That's at the same time that the industry went through a hyper-inflationary period which drove margins higher – across the board, but also with Abercrombie. Without such an aberrational industry environment that allowed pricing power to exist in an otherwise deflationary industry, ANF would absolutely not be a triple digit stock today. Without the benefit of pricing to drive comp, the company has to go out on the risk curve and drive its comp with units, which is a very dangerous game to play in apparel retail. Not only do you no longer have the GM lift price give you, but you've got to deal with higher discounting on bigger unit inventory buys. We think this bullish trend for the industry is officially over, and should start to show up in results for some companies starting this quarter. What's up for debate is whether these 'inflation spreads' will actually go negative, which takes unit economics materially lower from here. We think it will. And ultimately ANF is looking at $4-$5 in EPS power vs the $7-$8 in EPS that the Street is underwriting today on a go-foward basis. That's good for about a $50 stock vs $122 today.
Home Depot (HD) | Removing From Short List. It wasn’t a great short, but since we went bearish HD in Fall 2022 the stock went up 21%, the S&P up 41%, and XRT up 26%. We generally look for bigger alpha and absolute return than that on shorts, but in the context of HD being one of the biggest long term consensus longs in Retail, we’ll take it. Now as we look at the stock, 2024 EPS has fallen from $18.60 to $15.35. And comp expectations look more reasonable than the setup back when we made the bear call as we flagged in the last housing downturn HD comps were down for 16 straight quarters. The market thought that we’d only see one in 4Q22, yet now it has been 5 quarters of down HD comps, and the Street has 3 more forecasted. Our analysis suggests that we could see comps miss again this year, but now with the SRS Distribution acquisition HD has an EPS driver to keep numbers up and trending better than the competitive set. Since the deal announcement the stock is weak, down 13% in a month… over last 3 months HD has underperformed the market and XRT by about 1000bps. HD is the stock we’d want to own for the eventual home turnover recovery, as we think it has the strongest market position and best track record of execution. We like FND and LOW as the Short plays in Home Improvement at the moment.
On the FND point, an under the radar risk for FND that recently surfaced. The Tile Council of North America (trade association representing manufacturers of ceramic tile, and other tile-related products) on April 19th proposed a significant tariff on imports of tile products from India. The proposal notes that the Indian government subsidizes the product and we have seen a drastic lift in Indian manufacturing stating “Over the last 10 years, sales of tile from India have increased from a mere 344,000 square feet in 2013 to nearly 405 million square feet by the end of 2023.” FND doesn’t disclose a percentage of product sourced from India, but commentary from expert interviews suggests that the Indian sourcing percentage is high after the company shifted a material portion of its sourcing base to India during the 2018 Trump tariffs. This would present a potential margin headwind and or sourcing disruption for FND should the tariffs be adopted. Ultimately we’re bearish regardless of the tariff risk, as outlined in our Black Book on FND diving in on store economics the earnings potential in the coming years in different scenarios of home turnover CLICK HERE for REPLAY.
Amazon (AMZN) | Bullish Ahead of Earnings Tuesday. We put out initial thoughts on Amazon this Thursday as the correction around Meta’s print looked like a clear near term buy/Trade opportunity, especially with the GOOGL print likely to carry more positive reads (which it did). For that note see AMZN | Thoughts On Near Term Setup & Earnings After META. Ultimately this print is one where we think numbers look “good enough” even as the setup is not as bullish as the last couple prints given the rate of change is likely to be showing slowing growth here in 1H 2024, but we think there is enough upside to numbers to justify the stock being around all time highs. Should we see the $185+ level prior to the print, perhaps much of the upside is already in the stock. But we think the print will be solid. We’re expecting a 1Q EBIT beat and EBIT guide straddling the street for 2Q, with 10% to 20% upside in EBIT vs consensus for the year. Gross margin is where we expect the most upside, and AWS should continue to accelerate supporting the forward EBIT growth, which we think will be running 60%+ for the year and the AMZN multiple at a historically low 14x adjusted EBITDA.
Carvana (CVNA) | Not A Press Into Earnings This Week. CVNA remains a Best Idea Short, but we’re not sure that this print will be a negative catalyst. In the industry, used prices have been falling gradually, while units volumes recently picked up via lower prices. We think there is still a long way to go on price reversion in used, and the major players (like CVNA) will see margin pressure as prices revert. The company still has some one-time levers around selling off originated loans potential, and the company looked confident in near-term EBITDA. From a timing perspective we think later in 2024 comparing against some one-time items and GPU tailwinds is when the company has more risk of missing and EBITDA reverting lower. Then from a balance sheet perspective the point where cash flow risk really ramps is when the company has to pay cash interest on its debt, which is in about another 18 months. We reiterate that in our Bull scenario of our model and valuation framework from our deck in February (see our CVNA Black Book CLICK HERE) we get to around $80 in present value for the stock with big strong profitability assumptions and a 15x multiple. So even in a good print, the upside might not be significant, though perhaps we shouldn’t say that in high short interest names as short team squeeze levels generally defy normal valuation protocols. We think this company will have to reinvest to grow again, and that even as its profitability improves near term, the company is not generating free cash while holding a significant debt load. For more on CVNA also see our CVNA | 10-K Review, Buyer Beware. We think the stock has 80% downside risk over a TAIL duration.
Wayfair (W) | Bearish On TREND & TAIL Though Not a Press Here At Near YTD Lows. Wayfair’s category remains under pressure from a demand perspective with low home turnover, and margins are also under pressure as the space becomes more promotional and competitive intensity rises with Beyond (the former Overstock now run by Marcus Lemonis) going right after Wayfair's jugular by offering steep promotions to take share and super low priced players like SHEIN and Temu are applying further pressure. Ad costs have been up, in part fueled by Temu investing heavily for awareness and share in ecommerce. At the same time, Wayfair is promising both top line growth AND margin improvement, which is completely unrealistic. The stock just fell 23% in a month, so given the print should look at least in line, we’re not expecting this to be a big negative event. Demand trends from google look weak, though roughly inline with the trend when the company guided in late February. The most recent interest dropoff is from a shift in Way Day from late April last year to early May this year. The company continues to cut headcount, so looking for more profit likely at the expense of forward growth potential. At the same time its planning a large scale store to come later this year. That’s an interesting change in strategy as it opens up new revenue opportunities, but drastically changes the asset/capital returns to the negative side if that is where growth is coming from. W is a Best Idea Short with ~50% downside risk.
Driven Brands (DRVN) | Bullish On Longer Term Growth & Share Opportunity. So far in the auto aftermarket space trends have been ‘meh’ with steady to slowing comp trends for the industry reported in 1Q. Weather has been the main area of blame for weakness given above normal temperatures this winter. DRVN banners’ visits look decent below. They are showing the January weakness, but look to have improved since 1Q lows. We continue to think the industry will continue to benefit from an aging car fleet and the high incentives for consumers to invest in their current vehicle given the generationally low affordability on new and better used vehicles due to price increases seen the last few years and high rates. DRVN just needs to hit numbers for a few quarters and keep the long-term growth going and the stock could easily be a double or triple. This is a good activist target to split the car wash business – a perennially low multiple business – from the growthy, higher multiple maintenance business.
