We hosted a call on Friday outlining our short call on CRI.
Replay Link: CLICK HERE
Key Thesis Points:
Stocks for good businesses go down all the time
No doubt that this is a great brand and above-average company. Dominant in core – though the core is only 50% of total. Predictable-ish revenue stream over longer duration, and above average asset turns. Management is above average. This is not a ‘no terminal value’ short…but a very good short nonetheless if our model is right – and the cards are stacked against the company.
Growth, margins and returns have peaked
There are structural barriers to growth. Birth rate bearish, share gain ebbing, can’t consistently comp, growing into less populous markets, competition intensifying. GM benefit from sourcing tapped out, net short China, cotton up 25% since August, wage pressure. Capex rising, incremental cash flow going towards deals instead of investing in own brand. What was a ‘staple-ish’ margin profile reverting to apparel/softgoods. That’s bad.
Revaluation on a 2H miss and flat 2019
The simple fact is that our model for a 2H miss and flat 2019 has to be right. We obviously think it is. This name is feast/famine. Trades at a high teens multiple when beating on an improving algorithm, and at a 12-13 multiple on flattish growth. There’s downside to $75 from current $104 – or 25-30% over 6-9 months. If I’m wrong I think consensus is best case. At steady state multiple, there’s $115 over 12-months. I’ll take that trade off any day.
