Adidas: Taking off our Best Idea Long list. I generally don’t like making moves like this when growth is accelerating, and the reality is that I think that will be the case for Adidas in 2H. But the stock is up 45% YTD, and is trading on par with Nike at 27x EPS, compared to the 40% discount when we went Long in June of last year. Adidas goes to our long bench – not averse to owning it today – but I don’t see any material upside vs owning Nike.
GES: Moving higher on our Long Bench. Our conviction is growing around the margin improvement story, the US business is stabilizing while the rest of retail erodes, and the Macro climate in Italy (which represents an outsized portion of wholesale/licensing cash flow in Europe) is facing Macro tailwinds. There’s no reason why this can’t be an 8% margin business, and it’s currently sitting at 4%. Massive CEO insider buy.
ELY: Adding to the Long Bench. The activist angle makes all the sense in the world right now, as Callaway is gaining share in balls, benefitting from a cyclical pop in golf equipment spend, and its stake in Top Golf can potentially be monetized at 25%-30% of the ELY’s entire market cap (and eliminate 50% of ELY’s debt). Also several non-core brands that make sense to divest. Not a Best Idea for us right yet, but conviction growing.
AZO: We’re altogether less constructive now on the auto parts retail sector than we were when it was mired in controversy six quarters ago. The group is up 50% since we came out bullish on ORLY and AAP in January ’18. And while AZO is gaining share in the commercial segment, the reality is that it still represents only 20% of the business, and has the shallowest competitive moat to AMZN – which we calculate as having a $27bn opportunity in the space. The stock has pushed above $1100, and the margin for error here is nil. I wouldn’t own it here. Taking off Long Bench.
KSS: Still a Best Idea Short, but this stock has been absolutely shellacked – down 39% since the high in April and a horrible 1Q. Now occupies the lowest position on our Best Ideas List in over 3-years – but still squarely on the l list because numbers are definitely not slam-dunkable this year, and we’re 20% below the consensus for 2020. There are TAIL risks still not being priced in at $46, but admittedly this is not as juicy an idea today as it was when the stock had a 7-handle and a whole lot of AMZN hype (a partnership that is likely to fail for KSS). April Black Book Replay Link: CLICK HERE
JWN: Similar to KSS, still a Best Idea Short, but lower conviction as it’s only 15% away from where I’d cover it. Stock down 52% from November peak in an up market. The family couldn’t find a backer for an LBO at $50, but they arguably still want to own it, and the stock is sitting at $33. I think this stock makes it into the $20s in Quad 4, but I want to keep this one on a tight leash. Unlike KSS, it’s a survivor.
OXM: Higher conviction as Best Idea Short. This is a zero gross profit growth company with margin and inventory risk at its crown jewel – Lilly Pulitzer. The stock shook off a weak quarter bc it beat a sandbagged guide. Now trading at 17x earnings and a sub 4% FCF yield while higher quality businesses like CPRI and TPR are clocking in at 10-12%.
LB: Booting this one from our Short Bench. The ‘VS is broken’ thesis is complete consensus, and the stock is down to 9.7x a doable number for this year. Couldn’t get me to own this given that Bath and Body Works is still sitting at an unsustainable 23% EBIT margin. But this is a low-conviction short for me with the stock below $25. Will revisit on a (big) bounce or if the research call tells me that B&BW is going to crack.
