This is the first time in my 10-years at Hedgeye that I have pulled a complete 180 on a stock. I’m taking UA(A) off of our Best Ideas Short list, and am going long. To be clear, this is not a high-conviction long like Coach -- YET. Aside from Kohl’s, this might be the most consensus short in retail – but unlike KSS, this one has terminal value – a lot of it. There's more work to do on the Research Call to gain conviction here, but a lot of what we're seeing here could be setting this name up for a BIG long in 2018.
My short view on this stock wasn’t the ‘it’s expensive’ consensus short call. My view has been (and still is) that Plank is a winner – he should fire himself -- but he’s a winner. Unfortunately, when you have a brand problem AND poor execution, it costs money to win - -a lot of it.
It’s a double dose of misfortune when one of the best CFOs in retail (Chip Malloy -- former Top Gun pilot) barely lasted a year with Plank, and UA was subsequently downgraded to junk amidst the top-line implosion while it was pushing ‘meh’ product into Kohl’s, DSW and Famous Footwear. (I guess that’s a quadruple dose of misfortune). By my math, in order to put in the infrastructure to declare some semblance of victory for shareholders, he’s gonna have to tap capital markets for $300-$500mm after using up his revolver. If that event happens the stock’ll be flirting with single digits.
All of this mattered a lot – before the stock cratered 45% for the year-to-date.
Now we’re at the point where the ‘Athletic Cycle is Done’ call is absolutely consensus. The consensus call there might be right if numbers keep coming down, but I think that UA would need to re-set expectations to 2-3 years of losing money (ie Wayfair) in order to take another meaningful leg down. Not gonna happen unless my ‘model stress test’ is simply too weak. In other words, it’d have to make a huge statement to the investment community that it’s becoming Reebok. You can say what you want about Plank as a heavy-handed intimidating “I don’t care if you cry in my senior staff meeting” kind of guy, but he’s not gonna be Reebok (ie, #fail).
The parallel reality is that Plank is NOT Paul Fireman (Reebok CEO). Fireman stripped Reebok of capital, over-earned by 300bps (at a 6% margin) and orchestrated what I’d call the ‘deal of the century’ by selling it to Adidas at what was ultimately a 30x EBITDA multiple. Plank, on the flip side, has not been afraid to invest. His demonstrated ability to properly invest capital is slightly better than my ability to dunk (I’m 5’ 6”). But I don’t think he’ll be afraid to step it up today.
In this world of ‘what the heck can I long in Retail? ’ (something I vehemently disagree with), I think that when a brand with such defined Intellectual Property and relevance with the consumer actually steps up to invest in fixing an issue, people will pay attention -- or at least not jump on the short bandwagon with 28.6% of the float betting against the CEO. After accounting for the closely held float and long-onlies that will never sell it, you could make the case that well north of 50-60% of the REAL float is short.
WE’VE SEEN THIS FLICK BEFORE
Remember when LULU went to $3 a decade ago? Biggest buy ever. From that point it was a 10-bagger, and THEN doubled. This is like LIZ/FNP at $1.96 back in ’09, before it became a 10-bagger, and then nearly doubled. My concern on UA is that we test that ‘capital market tap’ level of $10-$12. Clearly bad with the stock at $16. A bigger biggest risk to being long is that Plank simply does nothing, the topline melts and UAA is valued by the market on sub-$1ps in EPS in perpetuity instead of on some ‘can it ever be Nike’ sales multiple. If/when I gain confidence that neither of these things will happen, then this is setting up to be a great candidate for a Best Idea long (if not THE Best Idea).
Keep in mind that this is EXACTLY what happened to Nike when it lost 60% of its market cap in 1999. And yes, Phil Knight was still pseudo-cocky in his 50s (not as bad as Plank, but still). I’m not saying that UA will become NKE. In fact, it won’t. But people called Nike out seven times since 1968 while it learned how to restructure and re-set -- EVERY SINGLE TIME -- for the next burst of growth. Heck…Phil fired himself twice…and he’s still Phil Knight – and worth 4x UA’s entire Enterprise Value today.
After all, if the incremental capital is invested with even reasonable competency, then the $3-5bn in revenue optionality (which absolutely exists) will matter. The sheer cost of that revenue mattered when this was a $53 stock with revenue growing at 25% and was at 3x the EV as LULU. I don’t care about expensive growth today. All I really care about are signs of life, and it’s far more likely than not that we see it over six months.
Game on Kev…lots of people are betting against you. They tried that with Gary Friedman at $25. Let’s see if you hate shorts as much as he does.
-- McGough
