I’m making a lot of changes to HedgeyeRetail’ s Idea List today. Here’s an overview of all ideas – 48 of them. Six longs. 13 Shorts. 29 names on vetting bench w either a long or short initial read.
To be clear on the #process, all names start on the bench – could start as a long, end up as a short…whatever. Currently have 200 names on my ‘vetting prospects’ (ie the screen I look at each day). As we gain conviction on a name, it gets moved up – maybe to Best Ideas, maybe not. Bench ideas should only stay there for as long as the initial vetting process takes. If I’m doing my job, I’m opening the vetting process to you. If a name does not pass the final stages of the vetting process -- i.e. I don't think it's a good idea after all -- then I’ll punt it and explain why. #transparency.
Lastly, this note is the equivalent of ‘Idea Speed Dating’. One sentence for each idea/vet. Is it because I’m writing this during the Super Bowl? Nah (even though I am). But if I don’t have a good hook in one (run on) sentence, it’s either a bad idea, or I simply can’t communicate.
($) = Moves higher on the Idea List (i.e. incrementally Bullish)
(X) = Ditto inverse
Here goes…
Starting with Shorts – because I can.
BEST IDEA SHORTS
- HBI: I still think this will prove to be one of the best shorts of my career – even from $19 – as ultimate CF and EPS supports $5 stock.
- LULU: Losing share, diluting returns with poor quality growth – bad management buoyed by the category – expectations too high in 2 qtrs.
OTHER ACTIVE SHORTS
- CRI (X): Mature baby brand, losing share first time ever (?), going to Canada, no price integrity, just missed for first time in a decade – likely to miss again.
- RL (X): You don’t fire the newly hired best CEO in retail when you’re 79 years old and have a big brand problem -- $2.50 in EPS vs Street at $6?
- UA (X): Plank need to fire himself – needs $600mm in capital and just downgraded to junk – equity deal?
- FL ($): The TAIL call here is almost as bad as Targets, but the near-term actions out of Nike should delay the negative comp.
- TIF: Brand problem, management problem, Cumenal out, Krakoff might help in 3 years after taking up SG&A = earnings problem.
- HIBB: 400bp in margin downside as it fails in building an ecomm platform that Nike would not let it build in the first place.
- TGT ($): Such a horrible TAIL and even TREND call, but the world knows it – taking this off Best Ideas for now.
- KSS ($): Still terminal – credit problem, store problem, management problem, lease accounting problem, sub-prime problem – but off Best Ideas (this was tough) as near-term expectations prob doable, and what IF Macy’s buys it, or AMZN decides it wants strip-mall boxes/DCs?
- BBBY: The cool thing about bad companies on a 5-year low is that they can keep setting 5-year lows.
- WSM: Setting up for the biggest (negative) trading bifurcation between WSM and RH since 2014.
- M (X): Co playing the prospect of being acquired when CEO on his way out – but why can’t it be the one doing the acquiring (remember May in 2005)?
BEST IDEA LONGS
- NKE: Changing a 40-year paradigm in a business bigger and faster than the Street thinks.
- RH: I blew it on this one last year – with a '$28 to $105 and back again' round trip -- but revs should turn up and the TAIL call should rear its head in 1H17, giving people a reason to believe again (even if they don’t).
- KATE: Higher probability of a take-out at a higher price than the market thinks – and the base business is very defendable – 4 to 1 up/down.
OTHER ACTIVE LONGS
- DKS: The TSA call was irrelevant…DKS playing a critical role in Nike’s ’40-year paradigm change’ – top decile in Retail EPS growth this year.
- W ($): Likely to never earn a dime, but balance sheet should allow the growth story to perpetuate for a decade – and people likely to believe before they don’t; and 2017 revs look likely to improve on the margin.
- WMT (X): One of two companies investing big in a generational change in shopping behavior, unfortunately the other company doing that is AMZN.
LONG IDEA BENCH
- AMZN: The most consensus call ever, but people are actually not bullish enough long-term…at risk of leaving money on the table I’m waiting for more near-term controversy (ie will earnings matter if sales slow to 19%?).
- BBY ($): Here’s a first for me – but incremental damage by AMZN should be less as it goes after juicier categories like Grocery and everything else it has not yet decimated…BBY still NEEDS to exist (for now).
- GIL: I don’t love it outbidding AMZN for American Apparel, but low-cost advantage wins in a Trump/Border Tax environment – nobody is lower cost than GIL.
- LB: Sex sells – always has, always will – and Victoria’s Secret (one of the most powerful apparel brands EVER) owns sex.
- ABF-GB: The Primark call is binary – it works and kills the middle of the industry (ie Gap), or it fails and severely damages the middle of the industry on the way down.
- ULTA: Not sure if I ever will ever have an edge here – which is why I missed it at $150…waiting for the pullback I’ll probably never get until the fundamentals change (then I might not want it).
- HBC: One of the best take-out candidates outside of KATE?
- GME: Really McGough? I can’t stand this company, but as w BBY, AMZN incrementally going elsewhere…maybe this is a short lived vet – after all, Blockbuster was a great long idea for someone at some point (until it wasn’t).
- MALL REITS (GGP, SPG, TCO, MAC, TCO,VNO): Out of any segment of anything that touches any part of retail, there’s probably no bigger opportunity for a big call than the REITs – the consensus is that the REITs are toast…I’m not so sure.
SHORT IDEA BENCH
- CTC.A: Bottom quartile Canadian retailer, big credit exposure, overexposed to real estate – trifecta -- or Hat Trick (or whatever).
- GCO: Trucker hats and mid-tier dress shoes overexposed to weak malls.
- HOME: How this deal got past the commitment committee at BofA and Goldman is beyond me.
- GPS: "Cal, be better than the Gap" – it’s a consensus short, but sometimes the consensus is right.
- JWN: Historical competitive advantage is all but gone -- second biggest margin risk for a box-operator outside of HIBB.
- JCP: Only a long if it will be acquired – and Goldman will get paid first on securitized properties before shareholders do (if they do at all).
- TLRD: Average (MW) + Average (JOSB) = going away…stuck in the middle of the menswear road – pick a lane or get hit by a truck.
- FINL: Potentially worse off than FL – and there’s a roadmap to losing money in perpetuity.
- PRTY: Vertical sourcing strategy is over – now needs to party on its own – not sure the street will like what it sees.
- ELY: There will be money to be made in golf when the bottoming process is done – but ELY just made a very flawed acquisition.
- COLM: Brand losing share, competing with an increasingly desperate VFC – and the Sorrel fashion push is a year old (= bad rev).
- GNC/VSI: This #retail1.0 space does not need to exist – the rewards program has no more competitive edge and has to change – but I struggle figure out how even the best management team can get these models to matter in a space where upstart brands are better positioned and cheaper on better online platforms.
[McGough Note...I'm clicking 'send' on this note just as Brady pulled out a win. #AngryJetsFan. At least people will be in a good mood when I'm in Boston tomorrow.]
