Group call: Despite the 8% sell off in the XRT, I’m still definitely net bearish. This upcoming earnings season will be more critical than any we have seen in the better part of three years. Companies won’t guide up. Likely to temper 4Q growth, and expectations for margin acceleration on top of the of the biggest wage pressure we’ve seen this cycle are too unrealistic to cycle. Retailers budgeting for a 2-3% comp, and have ordered product accordingly. Either they hit it, or we have an inventory problem (and price war signals are apparent). There are some great longs in retail right now…but be VERY careful what you own. Short side is wide open with opportunity.
LONGS
- TPR: Higher conviction. I can’t ignore Coach China risk here (13% of sales, but ~20% exposed to Chinese consumer). But I also can’t ignore that the company is likely going to grow EPS by 10% when it otherwise guided for a flat year – setting up to harvest mid-high teens growth for three years to come (we’re 20% above consensus). The street is missing this one. Black Book on Thurs outlining our thesis.
- RH: Higher conviction. New $700mm repo likely to get done, which puts $13-$14 in EPS power in play over the above-consensus $12 I see today. Best and most transformational model in retail with near term catalysts. Not for the faint of heart, but solid for those with guts that like to generate alpha.
- GIL: I love this idea. The Fruit of the Loom DTC/Amazon initiative shows how badly low-cost capacity is needed for new brands at the lowest cost imaginable. GIL can do that better than anyone, and it is – it just is not in guidance yet. $1.90 EPS going to $3.00 over 2-years. If you don’t think that GIL will manufacture Amazon essentials, you’re missing something.
- AMZN: people incrementally asking me if the trade is over now that we have to rely on higher Prime membership fees to drive the business. My answer is no. Will be one-upping BABA by providing a leg up for brands underinvested in ecomm to sell on AMZN site – that’s new and its big. This ain’t over folks.
- ORLY: No change in conviction. I really like owning this space in 4Q. Fundamentals are improving and ORLY taking share on the margin. Monro/AMZN partnership is real (ie playing up AMZN risk), but showing that it can’t hit ORLY where it hurts – or matters.
- DLTR: Higher conviction. Compensation change announced last week shows us that mgmt feels the heat that activists are on their tail to make the biggest no-brainer fixes to the model that I can point to out of any others in retail today. Company hosted group from RBC last week and was confident on two things 1) finding out the formula to fix FDO, and 2) steadfast in not breaking the buck at Dollar Tree. I don’t believe either, which is why I think a PE buyer could scoop this up and print money over a 2-year time period.
- ADS-DE: No change in conviction. Looks less attractive relative to Nike given the latter’s sell off. But fact remains that you get 50% higher growth at a 30% discount to the Nikester. People are missing the sustainability of ROIC-accretive growth here. That’s the call. I don’t like the Arsenal endorsement. But I like the stock.
- PVH: I’m adding this to long bench. Looking cheap relative to underlying growth optionality as well as the rest of the group. Selloff from $168 to $126 way overdone.
- DKS: Incrementally bullish. The selloff from $38 to $33 puts this thing at 10x our next year’s earnings estimate – at a time when Nike needs to beef up allocations to put DKS back above the 20% floorspace threshold. This name looking really interesting here.
SHORTS
- HBI: Higher conviction. SHLD is ~2.5% of sales. My confidence in a 4Q miss just went up. Recapture rate will be close to zero. Fruit of the Loom going Direct to Amazon is a tell as to the pressure in the core innerwear business.
- KSS: Hosted a group at HQ and said ‘weather has been tough but I think we’re ok.’ For other reasons, I think that KSS is going to have to temper growth expectations in 4Q. Higher conviction short side.
- TGT: Higher conviction short side. Management’s comments in NDR over past two weeks has emphasized for me how clueless it is relative to WMT’s strategic plan to kill it in home delivery. And it’s new private label brand is self-cannibalizing. Not good.
- CRI: No change in my tone here, though I’m still very bearish on the name. Amidst a net share losing position in its core business, there’s no way it’s going to hit its Toys R Us recapture goal of 50%. Not even by half.
- FL: Hasn’t participated in NKE’s sell off – though it should. This jet.com partnership with Nike is going after FL’s jugular. It will be a higher price point than people think. That last Nike conf call was one of the most bearish FL events I ever heard and yet stock didn’t react.
- UAA: Less bearish. I like what the company has been doing on the marketing side over the past few weeks. A few marketing campaigns can’t fix a structural inability to grow, but there’s something about UA’s refocused marketing messages over the past few weeks that I just can’t shake – and I think they’ll resonate with buyers like DKS (and KSS).
- GPS: I agree that this is a lazy man’s short, but WMT leaving Synchrony makes us think SYF is slow in adding lower end credit customers in retail. Crimping borrowing capacity for GPS's marginal/incremental customer at Old Navy.
- NKE: Yes, I like the $10 sell off. But the reality is that it is 100% justified. US business is not rebounding to the magnitude that consensus thinks, and outsized risk remains in China, Emerging markets, and to a lesser extent, Europe. I’d love to buy this stock $10 lower – perhaps that means it’ll never get there.
- LB: Stock up on VS comp and announcement of La Senza disposal. But the reality is that Bath and Body Works is now the largest EBIT contributor even though it is only 34% of sales – and it is sitting at a 23% EBIT margin. It’s overearning. By a lot. Add that to the fact that LB has ‘perma-cheapened’ Victoria’s Secret and this thing adds up to a value trap at $30. Gotta add this one to the bench.
