Not sure which is the better poster child for our ‘Apocalypse Now’ (2H earnings misses of 1,000-1,500bps) call – KSS or GPS. Definitely expect some major fireworks out of the KSS numbers. I’m looking for an EPS beat out of KSS --- which definitely makes it tough sitting on the short side (which is where I’m parked). Comp should look good here. I’m at 3.5% vs the Street at 2.6% -- and that’s with an estimated 350bps help from calendar shift. All in we got $1.76 vs Street at $1.64 and that includes bullish gross margin set-up due to clean inventories coming out of 1Q. I’d bank on mgmt flowing about half of the beat through to the FY guide. THAT’s when the near term short case becomes particularly compelling. Keep in mind that in 1Q management took up the year materially – something it almost never does so early in the year). It HAS TO beat this quarter. Back half comp, gross margin and SG&A expectations are skating on thin ice. Unless KSS can comp 4% or better in 2H, there’s no way the company hits the new guide. With this stock testing all time highs due to near-term temporary (unsustainable) factors while the secular story is evolving into an all time low – it’s tough to ignore KSS short side at 15x earnings (and 20x our next year estimate).
WMT set a colossal bar for TGT. After Wal-Mart printed the best comp in over a decade, market expectations for TGT went immediately to +5-7%. Published consensus is 4.1%, and we’re at 4.8% with 40% ecomm growth. If we see something below 5% I think there’ll be trouble in paradise – especially given that the TGT credit card data has supposedly been outstanding. This Q for TGT is different than WMT’s in 2 important ways. 1: TGT has higher expectations built into 2H on sales and EPS given the calendar dynamics, 2. TGT has bloated inventories relative to WMT, i.e. higher forward margin risk. Also note that WMT saw GM% down 34bps this Q due to price investments, increased transportation expense from higher fuel costs and third-party transportation rate pressures, and the mix effect of growing eCommerce business. TGT should see just as much pressure with the same industry dynamics while having a worse inventory position and meaningfully higher labor costs. I’m looking for a good print, weak quality guide. You want to pay 15x an all-time high with only 5% of the float short when WMT is stepping on the gas in 2H with price promotions? This company has terminal value, but equity holders need a lot of luck – and a sustainable US consumer re-acceleration – to make any money long side. This is a low risk short from where I sit.
GPS is one of the poster children for our Apocalypse Now 2H retail set up – i.e. the one you step on heavy short side as it beats 2Q. Though Old Navy has been outperforming, I don’t think GPS can comp the comp in 4Q with any of the concepts, with partial pressure from the fact that SYF is pulling back on credit extension to new customers. Add on the fact that the company is lapping a one-time gain from its Fishkill DC fire insurance settlement in 4Q that it didn’t adjust for, means an already ambitious earnings bar moves higher. We should see GPS miss 2H earnings by over 1,000bps. Why in the world anyone would pay 15x EPS for GPS with less than 10% of the float short is a mystery to me.
URBN setting up for some pin action. URBN is new short side for us, clocking in as one of the higher expectations stocks for not only the quarter but the year (after running by 140% TTM). Already noted mid-teens comps for 2Q in its 1Q 10Q, and GM compares are flat out easy. Street looking for $0.77 vs $0.44 last year – the 75% earnings growth shouldn’t be tough to nail. But what happens when EBIT growth slows to the (still respectable) teens in 2H? Not sure how that 38x multiple will feel about that. Not sure I get how or why the short interest was 33% when this was a $20 stock, and now is down to 17% when it’s at $45. Not my favorite short – I’d rather press KSS, GPS and TGT, but this one looks to be setting up for some pin action.
WSM is a perennial favorite short of mine, but I’d argue that its less juicy headed into this quarter, and if anything I have a bullish bias. Not likely to experience the same comp and EBIT miss as others mentioned here in 2H. Street is only looking for 10% EPS growth this quarter, including a 140bp sequential slowdown in comp that is unlikely to happen without the same ‘blind strength’ expectation in 2H. The stock is not overtly expensive at 7.4x EBITDA, and short interest is sitting near the historical peak of 25% (not to mention that there are more Sell than Buy ratings– a la JCP and SHLD). If you’re gonna be short this name into this quarter, you’d better have one hell of an edge on the research call. I don’t. In fact, I think RH is killing it – again – and though the customers are different, the comps tend to move in tandem.
