Lots of changes (12 to be exact) to our Idea List this morning.
First off, we broke both longs and shorts into three categories 1) Best Ideas, 2) Other Active Longs, and 3) Bench. All three labels speak for themselves. Best Ideas are our highest conviction names, Active Ideas includes names where we’re officially on the clock – but lack the conviction at this point to make the ‘Big’ call, and the Bench indicates that either Research is still in progress, or the price is not yet appropriate.
A second observation…we’re looking at 3 Longs and 8 Shorts, with roughly 10 names on the Vetting Bench. Definitely lopsided, but the latest rally took away the ‘cheap’ factor for a lot of these names.
Here’s a 1-liner on all additions this week.
LONG VETTING BENCH
COH: Near the higher range of where we’re comfortable, but the space continues to look good to us. COH likely to test higher than people think.
TLRD: When a name loses 75% of its value after botching up a deal, we’ve got to at least scrub it for some value – maybe.
FLEX: Flextronics. Not a retail name – but we don’t care. It’s got razor thin (3%) margins, and signed a major deal with Nike. We know that Nike is thinking VERY big on this one. We need to quantify the difference it could make. At FLEX’s margin structure, it could be material.
TJX: We’re more convinced that there will be excess inventory in the department store channel this year, which helps TJX. Also, Home Goods might only be 11% of the company, but it’s bigger than RH and Wayfair. Can’t overlook that. Yes, the chart and valuation are both scary. But you could have said that a year ago. And a year before that, and so on.
FRAN: We’re not sure if we ‘get’ the concept, but we also did not ‘get it’ when the stock was 2x where it is today. Not a lot of unit growth out there in retail today, and this name’s got it. This is worth a look (at a minimum to see if it should or should not be growing – either way, there’s a call).
HBI: We don’t like the Brands, the Company, positioning in the Category, the Management team, or the Stock. This is kind of like LULU (as it relates to those characteristics) but with less desirable product.
SHORT VETTING BENCH
PVH: The company is being celebrated for putting up horrible quality numbers. We think it’s seriously growth-constrained. Looks like a short is two quarters early given expectations – but we’ll be patient.
SHOO: Over exposed to two segments we don’t like – Department Stores and non-athletic/fashion footwear. Core business rolling over, growth from acquisitions drying up, new peakish margins, at a 17.7x earnings and 10.6x EBITDA screens like a short to us.
OLLI: A rare square footage growth story, but currently overpriced with underappreciated capital needs and long term risks to the model. When the company anniversaries its private equity IPO in July, we could start to see some fireworks. If so, we’ll have a front row seat.
DKS: No Sports Authority won’t be a big help to DKS, and not making up any of the margin dollars lost in Golf/Hunt. In fact, let’s look at the reason WHY TSA went under in the first place. Those factors are bearish for DKS. We’d previously been bullish on DKS – but that ship has sailed.
WSM: Just listen to that last conference call. This management team is perfectly appropriate for a $1bn company. Unfortunately, WSM is $5bn.
FINL: The same factors that will hurt FL (NKE aggressively shifting around traditional wholesalers) could destroy FINL, which trips over its own kicks when everything else is going just great in the land of shoe retail.