Takeaway: FL likely to beat EPS this Fri – I’m going ‘risk-off’ short side and will get heavy on green into material TAIL earnings guide-downs.

Out of any name on my Position Monitor, the one that has me most on edge is FL Short. Like, seriously on edge. My risk management hat is on tight heading into this one.

The datapoints are pointing to a healthy 4Q comp – I’m at 5% (people are chirping numbers at me as high as 8% -- though I don’t think FL has the inventory position to put up a +8%). But with inventories looking so clean at FL and NKE alike, Gross Margins are almost certainly trending bullish --– I’m +110bps (street is at +70bp). Then give it slightly above trend (4%) SG&A growth – still meaningfully below where it SHOULD be investing in its stores – and I come up with $1.50 in EPS with the consensus at $1.40. Now I gotta play that dangerous game of gaming how much of this has already been signaled by the credit card data…though the reality is that if the company beats by a dime +, the stock sure as heck ain’t going down that day. That’s called being wrong.

Per Keith’s risk management levels, FL broke out to bullish TREND in JAN and is now Bullish TRADE and TREND currently w/ TREND support = 55.20 and @Hedgeye Risk Range = 56.63-62.02. The good news short-side is that we’re pushing the high end of the risk range. Bad news is that a $0.10 4Q EPS beat on Friday could be a fundamental catalyst to put a new (higher) range in play.

That’s when I’ll look to get loud on this name short side, given the HUGE negative variance to the Consensus I’m modeling on a TAIL duration, as Nike clips the higher end of FL product allocations in favor of selling direct at a 2,000bp margin premium. Nike ratio at FL has 1,000bp risk (It's pushing 70% today, with downside to 60%) -- that’s when FL productivity turns down, it deleverages occupancy, while simultaneously stepping up capex to refresh stores. Ultimately it is likely to give back at least half of the 600bp tailwind Nike has had in margins over the course of this cycle. There’s your cash flow squeeze that takes away valuation support.

Unwinding a 40-year paradigm of how we distribute shoes in the US is one of the more powerful secular changes we’re seeing in retail today. It’s also not linear, and it makes risk-managing near-term datapoints on a stock that otherwise appears cheap (on fake numbers) critical. This FL print is the poster child for managing differences in TREND vs TAIL duration.

FL | Respect Duration Into This Print - FL FInancials Table 2 25 2019

FL | Respect Duration Into This Print - FL Sigma 2 25 2019