Here’s your KSS doomsday short scenario – ie what could blow us up short-side.
When my team met up yesterday to discuss our top Ideas, we went through a doomsday scenario on being short KSS heading into 2H. It includes just 1 or 2 of the following factors…
- Mike Ullman Roger Farrah, or Glenn Murphy-ish persona joins the Board,
- New CEO from quality retailer – Stefan Larsson, or someone remotely close to his caliber (this is so unlikely)
- The company puts up a consolidated comp – of even 1% (even if by accident).
- We see a bump in June Sales due to the fact that weather finally turned on the East Coast (which seems more dramatic sequentially – ie less relevant – than yy. But still).
- The press release cadence of ‘just retail going private’ accelerates – even if 90% of deals can’t get done.
- The big one is that we DO NOT see credit roll this quarter. There no question that this has to happen…and happen now – even if by just a percent. I think we’ll see the first negative credit impact for the first time in 14 quarters. But if you only want to focus on one factor, there it is.
- We see announcements from DDR and other strip mall REITS (or even the Regional Mall REITs) about renegotiating leases with tenants to help them NOT go Bk. To be clear, KSS has the LEAST flexibility to improve lease terms, and I argue (As does math) that Leases ($2.20 EPS) = a more significant issue than credit ($1.70 EPS). But press releases of conference anecdotes from the key players would cause a headwind.
If I thought any of these things happening is likely, then I’d get off KSS short side. But I think (McLean’s KSS/COF credit model) that this is the quarter for credit, the magnitude of which would be an incremental negative. Then a dividend cut should become part of the story. And then leases…you get it. But “where could I be wrong” is always a key part of the process. There you go…
HERE'S THE CRUX OF OUR KSS CALL
Fundamentally, KSS ain’t played out. If you’re in the ‘damn I missed it – I’ll revisit on a good comp’ camp, you might miss the move to $30. Then ‘the bottom’ at $25 on a perceived 10% dividend yield. Then No yield at $20…JCP all over again.
Three pillars of the call
- Credit: $1.70 in credit earnings. Starting to roll – regardless of the credit cycle. This part of the call needs to be right – today – given dividend. I think it is. People finally starting to focus on that – but it’s not in numbers yet. You get a better deal on those UnderArmour Ts using your Amazon Prime card in KSS than you do with your KSS/COF credit card. Yes, that’s real.
- Real Estate: $2.20 in overstated EPS due to the egregious lease structure. Sorry Kevin…you can’t structure property deals 3x the duration of similar box operators like BBY, BBBY, DKS, HD, MIK, etc…There’s no way out and the management team that’s left knows it.
- Sub-Prime: $1.25 in INCREMENTAL sub-prime earnings over this cycle. This is the most ‘REAL’ of any of these pillars, but even if you give the company credit for this, there’s $3.90 in earnings that is fake. And that’s on top of expectations that KSS will earn $3.50 this year and annuitize that forever.
If I’m right on these three pillars, then the ‘consensus short call is no-where in the ballpark of being ‘bearish enough’.;
