We’re changing up several names on our Idea List due to confidence changes in earnings trajectory and price action following 2Q earnings. Here’s a run-down of our Best Ideas, and changes on the margin to our Bench.
NOTABLE CHANGES
JWN: Removing from Best Idea List short side. We’ve been short this since $65 and its worked. Unlike other department stores, this one is worth owning at a price – and expectations look hittable in 2H. Call option on the family taking it private. Stock repo accelerating. Under $30 this is a difficult short.
UA: Removing from Best Idea Short List. I fundamentally don’t believe in this business model and its ability to sustainably grow. But hard to press this under $20 after the 2Q sell-off from $27 with earnings expectations that are likely achievable. Moving this one to our Bench and will re-short higher.
Adding to Short Bench
- LULU: Seems like a sacrilege given that it’s putting up some of the best comps in retail. But growth is slowing, compares are getting more difficult, Gross Margins are at peak, it’s got a 36 p/e, and less than 3% of the float is short. Multiples don’t expand when growth slows. Period.
- TJX: Management cites that this is one of the best buying environments ever, but the company has one of the most consistently poor EBIT flow-throughs in retail. I know it’s a quality company, but its earnings algorithm is not quality. Increasingly unworthy of its peak EBITDA multiple – and less than 1% of float is short. I don’t understand the Street’s love-affair with this name.
- MNRO: Monro is often cited as a comp to Valvoline, but its not. Company is poorly managed, losing share, and earnings expectations look like a stretch.
Adding to Long Bench
- REAL: I think that RealReal is one of the best budding models in retail today – and the stock does nothing but sell off. It’s officially in ‘broken IPO’ land, but could be setting itself up for a multi-bagger over a TAIL duration.
- CHWY: Unlike pure play online category killers like Wayfair, this one actually has a sustainable business model that will likely result in real earnings. Stock seeing lower highs and lower lows since IPO, and while I’m not convinced that this price is right, I’m patiently waiting for the right entry point.
- SFIX: I was bearish on Stitch Fix when it was pushing $40, but sub $20 you gotta pay attention. One of the survivors of what is otherwise a perennial (secular) apparel recession.
BEST IDEA LONG
GIL: Still our go-to horse Long side. Biggest beneficiary of the exodus to Western Hemisphere manufacturing and stepped up private label contracts by mass retailers. In ‘capacity growth mode’ to facilitate much more robust top line, which plays out starting in 2H.
TPR: At this multiple, you get Coach for 5x EBITDA, and then get Kate Spade and Stuart Weitzman for free. Company holding analyst event on Sept 12th. Unlikely to deliver bad news. Kate has bottomed and synergies should crop up in 2020 – despite management’s conservative guidance.
DOL: Introducing higher price points in 2020 that should set up another multi-year comp acceleration and 20%+ earnings growth (nearly double the consensus) – you win on EPS growth here alone, but likely see multiple expand on top of that. No China issues.
DLTR: Give Dollar Tree banner a DG multiple and you get the Family Dollar business for free. The latter is inflecting due to remodels, and switch to multi price point at DLTR is worth $2-$3 in EPS if executed correctly. What happens if FDO outcomps DG in 2020? Think about that one…
VVV: The market is underestimating how the VIOC (instant oil change) business will absolutely dominate the competitive landscape over a TAIL duration. 30-60% upside despite recent run.
BEST IDEA SHORT
HBI: 2H setup looks terrible in Core Innerwear, and Champion is slowing. If the latter cracks faster than we think, this is a $8 stock. The 2020 setup in the absence of C9 and growth in innerwear could take it there regardless. Looks cheap, but numbers aren’t real.
KSS: Higher conviction here short side despite 2Q implosion. The Gross Margin line is starting to crack, which has buoyed the earnings stream here for the better part of 3-years. The story hinges on AMZN driving traffic via product returns, which is about as thin as it can get – especially given that the deal is non-exclusive. This is the last year KSS is likely to put up an EPS number starting with a $5. Street numbers wrongfully mirror management’s bullishness.
GOOS: Over-earning by 1,000bps, which should unravel amidst SKU proliferation in its non-core knitwear business and lower margin growth outside the US. While I’m modeling this margin slide over a 3-year period, the reality is that it is likely too happen sooner and more violently.
FL: A secular loser, but one that is starting to look cheap. I think it’s built to stay that way. FL’s gaffe was not guiding down this past quarter – even if management thinks it can hit the hockey stick 2H. Negative earnings revisions aren’t over here.
OXM: One of the few apparel business models that has yet to crack, but margins in Lily Pulitzer – its crown jewel – are over-earning by upwards of 500bps. Unit growth is slowing and the wholesale business is under pressure. Still carries a real multiple.
AMZN: We’re not wed to this one, but the reality is that the company is back in investing mode, as its spending up to fend off competition from WMT and TGT in grocery. Not a good Quad 4 stock. Will I still be short this in six months? Probably not. But the near-term setup isn’t positive.
OTHER NOTABLE CALLOUTS
RH: Higher conviction long side as its business remains strong while retail is melting down. One of the few businesses that has pricing power with both suppliers and consumers to completely mitigate tariff challenges. If I had to own only 1 retail stock over a TAIL duration, this is it. Top name on my bench waiting to de-risk Quad 4 – where style factors are traditionally not kind to RH.
NKE: Getting more positive here. While I worry about its China business, I don’t worry about its ability to pass through higher tariffs on both ends of the supply chain. The upcoming quarter looks very doable to me. Will likely temper guidance though – even though it doesn’t have to.
PVH/RL: Both names putting in multi-year lows. Only thing holding me back is that while both companies have guided to tariff impact for 2019, the reality is that the impact will be greater in 2020. Could be setting up for flat years. If that manifests itself in consensus estimates, I might want to bottom fish here.
CPRI: TPR the more defendable horse in this race, but CPRI at 5x earnings and a 15% FCF Yield says there’s a big guide down coming. I don’t think that’s the case. If the stock is still here once we de-risk Quad 4, I’m on board.
HD/LOW: Both companies put up nearly identical comp trends in 2Q, but LOW set much more easily beatable numbers for 2H. If I had to pair ‘em, I’d long LOW and short HD.
ORLY/AAP/AZO: Booted all three from our long bench (took ORLY off Best Ideas before the last print/sell off). Not enough controversy or debate in this space right now aside from weather – a battle I don’t want to fight. All the names have worked – passing through tariffs which accounts for half of comp. What happens when we anniversary tariffs next year?
ULTA: Not cheap enough for me yet. This last print was a game changer – in the company showed that it’s much more mature than its multiple otherwise suggested. Category trends remain weak, and updated guidance is not a slam dunk. I’ll be interested owning this at 15x earnings – which is a stock starting with a 1-handle.
