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Takeaway: Out of any call I have short side, the one I struggle most is risk reward on which is a better short over a TREND duration is HBI vs KSS.

Out of any call I have short side, the one I struggle most is risk reward on which is a better short over a TREND duration is HBI vs KSS.

  • My higher conviction call has been, and remains, HBI – where I believe there is terminal value, but it will all be in debt. But with the strong holiday, could we see better reorders in core product from legacy US retailers that have already reported Holiday sales? Yes, we could. The stock is up 13.5% from the Oct bottom – which underperformed the ‘junktail’ rally by roughly half. It’s on a Calendar year (i.e. quarter just ended and has some visibility on reorders in 1Q, while its customers’ FY ends in Jan). Hype over Champion (overblown). And better liquidity (though will go to pay for higher tax bill – as opposed to other companies getting a benefit). Coming off a squirrely but in-line 3Q, with a defined history of preannouncements. If there was EVER a quarter HBI should beat – this is it. Is this a set up for an outstanding short opportunity? Yes. But getting that opportunity at $26-$27 instead of $21.65 is what keeps me up at night. I don’t want to make the ‘I’m wrong, so let’s double down’ call. I hate those ‘I really like this call – but I’m wrong on it today’ calls.
  • KSS, on the flip-side, has officially become a battle ground stock. Naturally – after a 46% run off the Oct low. Now people think it’s a good idea again. Problematic leases, credit and sub-prime no longer matter, apparently. Company (outgoing CEO) touting that KSS is becoming a traffic story – even though KSS already has 75-80% customer penetration. That’s a bigger penetration rate than Nike, by the way. Just raised guidance and likely to come it at high end, but has false confidence in its ability to drive the business due to increased marketing spend when traffic this q was really driven by one of the best macro environments this cycle. Needs 2-3% traffic growth this year to actually leverage SG&A – highly unlikely). People starting to talk about $5 in EPS again, when I think $4 is the best we ever see again. In other words, EPS/Cash Flow downside just as great as HBI, but near-term event risk is out of the way.

So, the big question I have to answer is whether KSS is a better short today vs HBI – at least until we de-risk the HBI quarter. Perhaps. To be clear, this is not a change of opinion…They’re my top two shorts. But these are the things that keep me on my toes. It’s my job/privilege to share that with clients real-time.