We made some major changes to our Retail Idea List today. Here goes…
Thematically, our longs have meaningful, yet underappreciated, growth drivers (NKE) and have been punished/annihilated by the market (KATE, RH). Our bench is mainly composed of quality companies that have had a meaningful earnings/price reset, and it is only a matter of time before we think the ideas work again (PVH, RL, ULTA, AMZN, WWW, PIR).
Our shorts are composed largely of zero-square footage-growth retailers that are either overly exposed to deflationary pressures and/or have meaningful margin risk and are significantly overearning relative to consensus. This includes FL, KSS, HIBB, GPS, TIF, TGT, M, JCP, JWN, LULU, COLM and W.
Changes in Order of Top Longs
NKE: We moved this to #1 (from #3) on our list. It won’t make you rich here, but the earnings upside is very much underappreciated.
RH: Not our top name for first time since back when the stock was at $32. Still a core name for us. Earnings defendability in a recession is misunderstood, as is leverage as square footage growth kicks in and new store productivity improves. Only uncertainty is that RH does not report EPS until late March, a long time to wait. We think we’ll see a press release by the end of Feb, which should ease concerns.
KATE: No change. Sentiment in ‘space’ finally improved, and KATE should earn more $ this quarter than it has cumulatively in seven years. Then people should start to look at $0.70-$1.00 in EPS power for the year. Then it’s finally got valuation support – especially with the stock at $17.
Removed from Long Bench
DKS: The more we consider how bad the changes at Nike will be for Foot Locker, we’re now of the mindset that DKS will be hurt on the margin as well. Plus, we’ve been disappointed by the lack of margin-recapture in golf/hunt business. Sports Authority should hurt, not help (as many wrongly think).
COH: We think it’s rangebound between $30-$40. The stock’s currently at $35. When upside/downside is 1/1 we throw in the towel.
DLTR: We weren’t fast enough on this one. It was like a balloon underwater in the low $60s in Oct, then over the course of a week it rightfully popped to $75. Still likely upside from here in earnings, but we don’t think we have a real edge today. Revisit.
KORS: The model has proven to be far more resilient than the market expected. But the upside from here gets a little tougher. We’d stick with KATE – as ‘the space’ is bifurcating.
BBBY: Will this company ever stop disappointing?
CROX: As hard as we try, we can’t go the final mile on this idea. Cheap? Yes. Cash flow? Yes. Core Idea for us? No.
TLRD: After one of the most spectacular blowups of last year after the closing of the MW/JOSB merger, this name is trading at just 7x EARNINGS. The problem is, we still can’t get comfortable that the earnings number is real. We’d rather own DLTR if we had to own a recent retail merger where execution is paramount.
Removed from Short Bench
WSM: Though we think the company has issues long-term, the stock is arguably cheap down here. Not shortable anymore.
AEO: Vetted it, and don’t have a great edge on EPS downside. Need to bet on brand heat easing, which isn’t our game.
COST: Stock looked expensive – so we vetted it. Comps missed, and stock still looks expensive. But it’s a great company – and there are plenty of junkier ones to bet against.
Added to Long Bench
RL: This was on our Long Idea list, and yes, last week was a disaster. This company has so many issues it’s almost impossible to count. That said, this stock looks very close to a bottom. It might take a while to get paid (12-18 months) as it likely embarks on yet another restructuring, but this is one to keep a close eye on – and we DEFINITELY would not short it here.
PVH: Stock bottoming from a valuation perspective and easy compares on the top line, margins, and capital intensity over a trend and tail duration. Sentiment improving on the margin, as we enter year 3 of Warnaco acquisition. We have to assume that the worst of Warnaco’s skeletons are cleaned from the closet (regardless of what management says). Once we get past that, then we’re in business.
WWW: It’s tough to find names with a 20-year chart like this, and when the stock drops by 55% in under a year, we need to start giving its solid management team, deleveraging trend, and global diversification a lot more credit at just 11x earnings.