CHANGES TO LONGS
ORLY: Removing from Best Idea Longs. The stock has more than doubled since the 2017 lows and is up 50% since we added this as a best Idea long, and the half dozen category/comp killers have all been disproven as it relates to disrupting this category. Not averse to owning it, but no longer a Best Idea.
PLCE: Higher on the bench long side. This has turned into a huge hedge fund battleground stock, with powerful angles on both the long and short side. I’m initially coming out bullish.
HOME: Added to Long Bench. Just missed its first quarter since going public. Got sloppy with shrink, and questions the limited human capital model implemented inside stores (six people in a 110,000 box). But even with 3x the employees, the store economics here are extremely compelling. Huge square footage growth potential, with some of the best rent terms you’ll find in all of retail.
VFC/Kontoor: Removing VFC from long bench. The Kontoor spin is going to struggle to stack up to Levi’s – and even if I generously give Kontoor a Levi’s multiple, it pegs remaining VFC in the top quintile of ‘expensiveness’ relative to underlying growth.
CPRI: Higher conviction long bench. I don’t like adding more luxury to the long side of my ledger in Quad3 – bad backtest. But the reality is that this company has done $3.5bn in acquisitions with nothing to show for it. Our research today rests in building a bridge to value creation at Versace – and how to transition it from a runway brand to more of an everyday pseudo-lux brand with slightly broader distribution. That could double this stock if done right.
DOL-CA: Higher conviction Long Bench. When one of my trusted analysts says “Brian, we gotta be long this” I listen. Then I usher it through the vetting process…but Biolsi is pushing me on this one hard. Let’s see what the process decides…
TJX/ROST: Removing from Long Bench. Off price channel is getting crowded, and financials are getting sloppy while the Street expects the names to comp at a peak gross margin in perpetuity. Not gonna happen.
NKE: Higher conviction on Long Bench. The last quarter was sloppy to say the least, and the stock is still too expensive to me. But the DTC strategy is working – one of the few secular bull cases in retail today. I want to own it when there’s more controversy (like we’re starting to see with Converse, and growth blips in co-owned stores and China) -- but need a better price.
FTCH: Removed from Long Bench. At first I was bullish on the model bc the lux players genuinely need it to survive, and it has enough GM% to manufacture real earnings. But our conversations with vendors suggest that they’re not as happy with FTCH’s execution as bulls need to believe.
AZO: Move from Short Bench to Long Bench. Though the auto parts retailer with the weakest competitive moat, the reality is that its gained share on the margin for 2-quarters in the part of the business (DIFM/Commercial) that I like the most. It’s going to take a lot for me to go outright long this name, but it will take even more for me to short it.
CHANGES TO SHORTS
W: Higher conviction short side. See full thesis W | Structurally Broken Business Model: CLICK HERE
GPS: Moving to short Bench. I don’t think this Old Navy spin will ever happen. Lots of smoke in mirrors here by mgmt. The stock has since given back 100% of the pop after the spin-off news. Still downside here as Gap shrinks its footprint and Old Navy slows on the margin. But not enough downside to call this a Best Idea Short anymore.
SFIX: Higher conviction short side. I’m pitched this often as being a game-changer of a business model. But the reality is that I think the TAM is materially smaller and far less sticky than bulls are pitching me. I’m not baked on this one yet, but have an increased bias to the downside.
WSM: For the life of me, I don’t see how this company can put up a sustainable growth algorithm worth investing in. Slightly crowded short side, which is the only thing that prevents me from utilizing my resources to do a Best Idea deck. But this name is uninvestable.
ULTA: Removing from Short Bench. My analyst Jordan Minello has been lobbying me to go long this name since it was a $240 stock last August – but I couldn’t get over the slowing square footage, comp, and e-com dilution – so I waited for a better price to go short. The stock is now sitting at $350, and while I’m probably capitulating, I’m not going to waste time pinpointing when to short one of the few secular share gainers in retail.
AEO: Removing from Short Bench. #aerie growth impressive, and stock trading at sub 6x EBITDA. Not a short.
ASNA: Never thought I’d say this, but removing from Short Bench. Selling its junkier brands and delevering by $500mm – about 40%. When ‘junk-tailers’ de-lever by that magnitude with 34% of the float short – run the other way.
ELY: We’re bearish on golf equipment sales in 2019, but ELY is diversifying away from both equipment and golf. At the same time, its stake in Top Golf provides a floor that’s hard to pinpoint since Top Golf has much more long term profitable growth than people think.
TSCO: Our negative thesis here is around the benefit of tax reform to the TSCO core consumer (above avg income, rural) and the loss and potential slight reversal on that consumer disposable income boost last year. Above average income red state (low salt) Americans were the biggest beneficiaries. We just can’t nail down what portion of comp is tax tailwind vs company execution. Setting this one aside for now.
OLLI: Management is good at keeping street expectations ridiculously low. It has a 40x PE mult with an estimated 1.6% comp. Bulls won’t get off the long term growth story without some real problems or a big miss. Maybe there is one in 4Q, but probably not ‘til then. We’ll revisit in late summer.
COLM: Removing from Short Bench. I’m doing this one begrudgingly. Stock is flat-out expensive at 14x EBITDA, and hardly shorted at 3% of float short. But execution here is undeniable. Too many better places to fish short side than to wait for an otherwise reasonable quality company to break.
