This week, we made several changes to our Retail Ideas list. We also changed the format to address how we see each of these names playing out by duration. In case you’re unfamiliar with how we approach duration…
A) TRADE = 3-weeks or less. This is largely near-term catalyst-driven. Not where we spend the bulk of our time, but need to be aware of what’s coming down the pike nonetheless.
B) TREND = 3 months or more. This is primarily driven by quarterly modeling assumptions 2-3 quarters out.
C) TAIL = 3 years or less. This is the long-term call about market share, margins, and the capital needed to get there. For all names we recommend, we actually go out 5 years.
SHORTS
1) We added Foot Locker to the Short Bench. Trends look fine for FL today, especially in Europe, which is about 25% of sales. Nike and UA are fueling its momentum in the US as well. But the company is putting up a 10%+ EBIT margin on productivity of over $500/ft – 25% higher than historical peak. On top of that we’ve got a 15x p/e (close to peak), and are staring at sentiment scores that are among the highest in retail.
2) We added Macy’s to our Bench, and put it right alongside Nordstrom as names we’ll opportunistically look to get louder on as the research becomes more conclusive, or the price heads higher.
3) We removed Dillard’s from our bench. We originally were cautious on the name as we thought (and still think) that the $100+ real estate values being thrown around the Street were overstated by 3x. What we did not appreciate is the free cash flow story behind DDS. We won’t buy that FCF story here, but we definitely won’t short it.
4) We removed COH from our Top Three shorts. The punchline is that we think that there is at best $5 downside for this name, which is not enough for us given the risk to the upside. As much as we think that this Brand and Financial model are broken, we think COH makes a lousy short here. Here’s the link to our note on the name. (Link: CLICK HERE)
5) We moved DKS in place of COH on the top three. It’ll stay there unless the price corrects or estimates post-quarter come out to be too conservative.
6) We pulled Nike out of the Short side of the ledger and put it on the Long Bench. The name remains ridiculously expensive, but the fact of the matter is that in recent weeks Nike has made some moves that are incredibly rational on the cost side – like passing on Kevin Durant (to UA) and letting Manchester United go to Adidas. Both of those alone save Nike about $100mm/year. Combine that with easier SG&A comps in another 2-3 quarters, and Nike will likely have consensus numbers in the bag – and then some.
7) We added Amazon to the Short Bench. We’re long term believers in the model, but every incredible story has a price. We can’t believe that 300x earnings and 35x EBITDA is the right one for AMZN.
8) We removed DG from the Bench. But then about 30 seconds later we put it back on. We get the excitement around synergies of a deal with FDO. But we think that this bidding war is far from over. It’s already rich at 11.6x EBITDA, but we think it ultimately will have to pay somewhere in the mid-$80s for FDO – or about 13x EBITDA. When it is looking to pay that much for such a poor quality asset, we need to really ask ourselves about the prospects management sees in its core.
LONGS
1) Added Nike, as noted above.
2) Added URBN. This is a name we want to be bullish on, but have been wading in slowly. We think the management team is exceptional, we like the unit growth and e-commerce platform, and the problems at the core UO concept are definitely not terminal. The only thing holding us back is that having such highly productive concepts like Urban and Anthropologie that are doing $700/ft and $1,000, respectively are a double edged sword. They’re highly profitable, and very defendable. But turns in the business – both on the upside and downside – take an extremely long time to play out. Our point is that we could be sitting here in a year and people might still be complaining about weakness at UO. At some point it won’t matter, and that time might be now. But we need to do more research to get the answer.
3) Added HBI. Let’s be clear…we don’t like this company or the business. This is a classic example of a company with a growth-challenged base business that is obfuscating its core by acquiring other companies. It’s track record is amazing…just as one acquisition approaches its 12th month, it goes ahead and buys something else. But whether we like it or not, HBI has a great 12-months ahead. It has year 2 synergies of Maidenform plus a full year of DB Apparel. Growth will look solid, HBI will beat conservative expectations, and investors will get paid with stock repo and dividends in the interim. As a kicker, lower cotton prices start to accrue to HBI in about another two quarters. We think this stock works from here.