We’re removing CRI from our Best Ideas Short List. The call has worked for the right reasons. While we’re still very net bearish on Retail right now, we don’t think that either the magnitude of earnings revisions or multiple compression from here make CRI worthy of a Best Idea designation. There are far lower quality names to bet on that have more EPS downside from here than to get greedy with a survivor like CRI. We’d be interested in owning the name with a $6-handle.
As background, we went short after the 1Q print when the company promised a 50% recapture rate on lost Toys R Us and Bon-Ton sales into a second half, where we thought growth would be slower and more costly. We saw about 30% downside then, with high conviction 2H earnings would not be met and we would not see any positive revisions to earnings expectations for 2019. Earnings for 2018 have fallen in line with our model, the stock has dropped about 35% from its July high (about 1200bps more than the XRT), and though 2019 EPS numbers are still about 10% too high, the market looks to be pricing in a guide down to a more reasonable earnings target.
With the stock trading about 12.5x our 2019 EPS number and a 6% cash yield we’ll book the win on the short side for CRI. This is a company we think has 50% of its business as defendable, and a quality brand that will be a long term survivor. CRI moves to the short bench for now until we see earnings numbers come down. If the stock continues much lower, we’d be eyeing it long side for when retail growth headwinds start to abate.
