As much as I’d like to say that the retail earnings season carnage presents us with a buying opportunity, I can’t. The reality is that we just saw a draw down from peak multiples to something closer to what I’ll call ‘average’ (whatever that means). We saw this, in large part, without any meaningful degree of re-base in earnings expectations over the next four quarters. That’s a problem. We’ve got slowing GDP, crimped consumption, no more tax tailwinds, merchandise margin risk due to higher inventory levels, a disproportionate amount of risk to gross margins due to a reversal in mix back towards e-comm (B&M strength helped 2018), then tack on wage increases, higher freight costs and you’re left with a 500bp-1,0000bps EPS growth drag into 2019. That’s not even mentioning the tariff impact, which is another potential GM drag, or the change in lease accounting rules, which hurts reported ROIC and leverage – and will be a multiple compression event in 2019.
So the punchline here is that we’ve just seen the first multiple event. It might seem like it’s over – and you missed it short-side. But next we’re likely to see downward earnings revisions – and without a subsequent drawdown in the stocks will put the group back towards peak multiples. That’s a problem. More likely than not the stocks are down with earnings…and then there’s the risk of testing trough multiples while the Street explores the REAL floor in earnings expectations.
That’s what we’ll be presenting in our Black Book on Tuesday December 18th. Yes, there are places to hide long side. But make no mistake – this group is still very shortable. Even if you couldn’t click the sell button fast enough this EPS season, and kicked yourself thinking you missed each name that sold off – the truth is that there’s still plenty of Alpha to be captured short side.
Our updated Position Monitor is below. But note that we’ll have several material changes (additions/deletions) when we present our deck next week. Here are some incremental thoughts on a few names on my Position Monitor based on potential for earnings revisions…
AMZN: Taking this one off Best Idea Long list. Simply put, we’re facing a multi-quarter top line deceleration with no more margin acceleration. Long term winner? Of course. But earnings matter on AMZN now, and upward revisions are not in the cards.
RL: This is a big one for me. Pulling from Short to Long Bench. I still think there’s a Brand problem here that can’t be solved with a CEO from P&G. But the reality is that over a TREND duration, the P&L is getting better while the Brand is getting worse. The P&L is gonna win as it relates to the stock.
PVH: Second to DKS at top of the Long Bench. I never thought I’d see this stock approach anything as low as $100. It’s so close to being a Best Idea Long. One thing I’m struggling with is how PVH’s margins have hit lower lows during one of the greatest retail expansions in the company’s existence. Not sure if I believe CEO’s pitch that there’s 200bp in margin upside. But I think that next year’s numbers are very defendable (i.e. one of the names that won’t take down numbers).
TPR: Never thought I’d see this stock trade at 11x earnings…HUGE margin of safety here. Numbers not coming down – and in fact are likely to go the other way. Street is too low in 2019.
DLTR: This is one of those ‘if you lose you win, and if you win you win’ names. If numbers fall below $6ps – even if it’s Mr Macro’s fault – then the pressure that will be put on management will be even more fierce than what we see today. At a worst case $5.50-$5.75 in earnings – and a $60s stock – I think this name gets acquired outright by a private buyer.
DOL: This is gonna be a great long….but for the next 13 weeks it might be a short first. Numbers have to come down, and when the company issues initial (lower) 2019 guidance, we’ll likely get our shot on what I think is a long-term winner.
LULU: I’m not tempted to get back on board with the sell-off. Growth is at peak, and CEO is entering 1-2 years of investing to sustain share gain (even if the company isn’t articulating it that way – it’s still happening). I’ll be more interested sub-$100.
AAP: Moving this one higher on the long bench. This space is heading into year two of what could be a 3-5 year replacement cycle. Initial call was to own the leader – ORLY. Next call into the cycle is to own the leverage – AAP, even though its worked so far. It’s hard for me model numbers heading lower here. Street looks too low next year.
HBI: Still top short…even despite the fact that it appears it’s trading at 8x earnings. Fourth quarter and ’19 numbers too high.
UA: Could it hit $0.34 next year? Yes. But think about that…we’re asking if a name trading at 71x earnings can hit numbers?!? The question for me is whether or not it can actually grow its top line. The answer for me is No. Plank better crush it at the analyst meeting on Wednesday. A $23 stock needs it.
W: In a Quad 4 Hurricane, this is the exact type of name you want to be short. Growth is slowing, and it can’t earn a red cent on its best day. Management sells stock better than it sells furniture.
SFIX: Expectations still look too high to me. Company ran through 10-years of TAM in a year.
WSM: Down $20 since the print. Not as much EPS downside here as we have with other names. It’s moving lower on my short list
BBBY: Could this name actually be a long? Street looking for -18% earnings decline next year and stock trading at 7x that number. Likely to be acquired at this price…(Wayfair needs to own it).
OLLI: Still trading at 20x EBITDA and 32x earnings. Great story… but this name could still get cut in half.
FIVE: Ditto. If DTLR breaks the dollar price point, FIVE is in its crosshairs. Will be a terrible multiple event.
SHOO (new addition to short bench): Perhaps the biggest tariff exposure of any company in retail. Over 90% of product made in China. Mix shifting from wholesale to retail – which is margin dilutive. 4Q expectations look tough…and Street looking for up margins next year. Looks like a stretch
PLCE (new long bench name): This PLCE blow-up is such a black-eye for Elfers (CEO). She made a $13.5mm stock sale on Aug 27th at $135 – 35% above where shareholders can sell the stock today. McLean and I are at odds on this one. He thinks numbers are still too high next year. I look at a company that will have booked $1.75 ps in non-recurring costs related to e-comm implementation and digital fulfillment by the end of this year – plus another $0.20-$0.30 ps in a lowered bar bc of promos associated with the GYMB bankruptcy. Stock trading at a 7x EBITDA multiple on the selloff, and CEO won’t think twice about accelerating stock repo here. It’s going on our bench for further vetting with Long bias.
COLM (new short bench name): People are afraid to short it bc of a cold winter. Has extremely tough compares and margins are at 10-year peak. Big candidate for downward revision.
KORS: Going back on the Long bench. Down from $75 down to $44 over three months – margins back at trough, and though I’d argue it overpaid for the Versace deal, the reality is that it has a very defendable portfolio of brands (Kors, Choo, Versace) trading at sub 6x EBITDA with what I think is close to zero earnings downside. Can’t ignore that kind of setup.
SIG: per McLean…”This could be a ‘go to zero’ stock.” This is on my short bench and I missed the selloff on the print. But next year’s numbers don’t look slam-dunkable. Need to do more work on this one.
