If you’re one of the dozens of people who said “why the hell would you be long DKS McGough? If you’re right nobody will care. If you’re wrong you’ll be an idiot” then you were right. This is the first time in my 23-year career where I’m punting on an event. I hate seeing sell side downgrades after a blow-up – all of us do – very #oldwall – and very easy to poke fun at. It’s also invariably a sign of a weak process on researching the TAIL and risk managing the TREND. That’s why I/Hedgeye so rarely does it – our process protects us there. After all the only thing better than making money is not losing it.
This time I need to punt.
With four out of the five worst long calls of my 23-year career (I remember every last one of them), it was betting on a lousy company with sub-par management in a below-average space. This is the first time I’ve ever been long DKS, bc our research process told me that our ‘4 pillars’ call was the right one. 1) NSP, 2) NKE/UA need DKS = 200bp comp, 3) GM upside from TSA/Golf/Hunt, and 4) SG&A pad (200bp) from cutting e-comm payment to GSIC. Three of those four pillars are clearly working – new store productivity, in fact, accelerated to 118% this quarter, which is massive. But the comp simply is not there. What worries me most is that the Nike comp WAS there, which says a whole lot of horribleness about the 80% of the business that’s NOT Nike.
Earlier this week, I said that if this call did not work in six months, I’m out. To be 100% clear, that was not a hedge saying “if I get blown up/blow up customers then I’m out.” If I thought this guide was in the cards – even with 25% probability, I wouldn’t be anywhere close to this thing.
Could we see a relief rally after today’s capitulation? Sure. I don’t care if I miss that. Now the question in my mind is whether we need to see 3% margins instead of the guided 6% for the year – before we can see anything higher. OR, is this business a perennial 0% margin business. I don’t think so…and there’s asset value here. But the comp is the only pillar that matters right now – and it’s a black hole.
