NOTABLE CHANGES ON THE MARGIN LONG SIDE
TPR: People underestimating how this will mimic the RL license takeback/renegotiation story circa 2003-2006. Sell side likely to upgrade in 12 months at $70. Pushback is fierce. Higher conviction.
GIL: New high conviction Best Idea Long. This thing has got serious game. EPS from $1.90 to $3.00 over 2-years. Black Book next Thurs.
RH: Higher conviction…even after the run. Stock has given up some gains. Likely to accelerate comp w meaningful flow-through while the rest of retail is decelerating and fighting for margin in 2H.
VFC: Short leashed long. I’m playing this one for a 2H EPS beat/guide and to a lesser extent VFC stepping up deal activity. Never bet against VFC when it’s in deal mode. Potentially divest Lee/Wrangler to GIL? There’s a thought.
ORLY: I fundamentally and analytically disagree that Amazon can disrupt ORLY’s competitive moat to a level that will get in the way of a reasonably consistent 3%+ comp. This business is simply too cheap and too dominant to trade at parity to the market.
AMZN: Comfortable owning into 2Q – rev looks solid despite losing share on the margin to B&M over 2 quarters. Incrementally concerned about it turning into a margin story in 2H w higher prime fees (when the thing trades on Sales). My long angle here is AMZN turning into a BABA-Esque T-mall concept – starting with Nike. There’s a BIG traffic and revenue driver.
ADS-DE: I don’t care that Germany (and every other Adi team) lost. And yes, there’s a chance that Adidas guides down revenue for the year. That’s why the HF community hates it. I think the platform launches will keep US share gain going to the tune of a point per year – which is enough to make this model work. Then you get the Rorsted kicker. Not a huge conviction long, but today I’d rather own this than Nike.
LULU: Lower conviction. My best long call over the past year after RH. Tough to stay on this one here. But I’m not going to take a victory lap and boot it. Victory laps = weak #process. I want to see who new management is, what they’re empowered to do, and whether it points to a $3 EPS annuity (short) or $5 in earnings over 3-4 years – which would have teeth. Tight leash on this one at this price.
Puma: Waiting for the rest of management’s higher capital plan (athlete endorsements) to manifest itself on the P&L. Likely to be a big share gainer in ’19 and 20. But up front costs scare me. Might be too early – especially at this price.
DKS: Kicking myself for not going Best Idea before the melt up. But since it has given back half of its gains, and the only real risk to the business is firearms – bc Stack alienating core customers w gun media blitz. Nike putting incremental product in DKS to replace UA and FL.
KORS/VRA: If I’m right on TPR call, these names will work. The space is clean – M&A heating up, and growth re-accelerating after a 5-year slump. Kind of like what Athletic was 5-years ago.
DLTR: There are simply too many ways to win with this stock. We’re taking our research heavy into DLTR, DG, FIVE, DOL, OLLI and BIG now. Expect a Black Book this summer. Definitely more positive on the margin on DLTR.
ULTA: Still doing the deep dive work on this. Definitely have a positive bias. Could the store base double with minimal dilution? We’ll know the answer once our research concludes this month.
HIBB: Nike needs it bad. No changes to my conviction level. And hardly enough cap for anyone to care. But does not mean it still won't work.
NOTABLE CHANGES ON THE MARGIN SHORT SIDE
HBI: 2Q looks good, and then 2H setting up for a 20% CFFO miss, then 30% in ‘19. Road to a single digit stock.
KSS: It’s being valued like a growth company. When comp fails to materialize in 2H with costs mathematically heading higher regardless, the multiple and earnings risk here is the highest in the group.
TGT: Higher conviction. Needs 3% comp to hit numbers – which still results in down earnings. If everything goes right for Target in 2H, ROIC still erodes.
FL: Higher conviction. Nike’s US growth came from DTC – not FL -- and it stuffed the channel in Europe. Europe still a big problem for FL. Called out on last print, but weakness is broad-based – not just ‘Adidas' fault’. Big downside leverage here due to egregiously low SG&A latitude on weakening comp structure.
CRI: Slightly more bearish. No one cares about this call, but they should. Earnings at risk in back half, and gross margin story from bringing sourcing office in house takes away a powerful pricing lever CRI has used to drive comp. Cotton hurts here. A lot.
UAA: Higher conviction. The ‘normalized margin’ call is consensus, and it did not play out last quarter even though CFO has a 200bp cookie jar on the gross margin line. Most likely name (outside of KSS) to miss back half top line.
NKE: Lower conviction. Let’s face it, the quarter was great. Stock still only $2 higher than when we presented our Black Book. But still, I was wrong this quarter. I’m still concerned about a false bottom in the US business – with the trough being hit in Nike’s F3/4Q. Also VERY concerned about such strong sell-in (stuff) in EMEA in a climate where we’re seeing more negative sales data points than I can remember this cycle. If I’m not proven right within two quarters, I have no problem pulling the plug on this – though I think it’s a low risk short in the mid-$70s.
GPS: Poster child for a company that will get hit as retail misses earnings by 1,000bps in 3Q/4Q due to slowing sales and higher fixed costs. Also just anniversarying a period where it bought a clean inventory position by way of insurance payment for DC fire.
M: Actually, GPS not the poster child. Macy’s is.
RL: Slightly less bearish over a TREND duration. Over TAIL duration the company looks to me like the Abercrombie of 5-years ago from a broken brand perspective. Though new P&G CEO likely to find margin for 2-3 quarters while people hope and pray for growth. It's a matter of time before I gain more near-term conviction short-side.
BBBY: I’ve been running with the idea that Wayfair should buy BBBY. It gets less crazy of an Idea every day. The currency mismatch is obscene, and the fit is ideal. Tough for me to still be short BBBY when I’m saying that and it's trading at 7x earnings.
W: Higher conviction. I don’t see how Wayfair continues to go up. 3Q revenue likely to slow. CEO de-emphasizing the importance of growth while insider sales accelerate. And fragmented vendor base likely to to hit a wall with trade financing sooner than later bc can’t keep up w W’s growth algorithm. I like this short side into the summer.
