LONG SIDE
Capri (CPRI): Highest conviction name on our bench – Versace is a massive lever to pull. Only thing that keeps us on the side line is Kors’ 27% Department Store exposure – which is particularly challenged this holiday. We’ll de-risk this quarter before going Best Idea Long.
Revolve (RVLV): Out of all the digitally native business models/unicorns, this is by far and away is the most attractive. Extremely strong consumer pull-model, and is a real company with real earnings and cash flow that’s lived through two economic cycles. Two quarters until growth accelerates – which is when we get more interested long side.
Burlington Stores (BURL): Off Price is a winner in the #ApparelDepression, and BURL has square footage growth, margin upside, and a new CEO who will strengthen vendor relationships and merchandising processes. We’re waiting for numbers to rebase as the new CEO launches his 100-day plan before getting involved. But that’s all that’s stopping us. If there’s no rebase, we’re inclined to get involved anyway.
Tapestry (TPR): Once a Best Idea Long for us, the reality is that with the problems we’re seeing at Kate and Stuart Weitzman, it leans on the Coach brand to carry the growth torch for the whole portfolio. If it weakens, then this story gets real thin real fast. Lower conviction.
Real Real (REAL): The segment is a winner in #Retail5.0. It deserves to exist, and REAL has a clear first-mover advantage. But we moved this name lower on our vetting list because we have to look a good 5-10 years out in our model to get this beast to actually earn a red cent. Tough to build valuation support on this one.
Five Below (FIVE): Moved from our short bench to our long vetting bench. The reality is that the company is aggressively pushing the needle on sub-$10 price points, which should drive comp in an inflationary environment while protecting gross margin.
Tiffany (TIF): Removed from long bench due to LVMH deal.
Stitch Fix (SFIX): At this price, I worry about the breadth of the company’s TAM. It’s changed strategic directions too many times for me to be comfortable with management’s TAM estimates. I looked through those concerns with the stock in the teens. But not at $27. Off vetting bench. In the $30s I’m more inclined short side.
American Eagle (AEO): I like the 10% FCF Yield, but I’m concerned about the 80% of the business that’s not Aerie.
SHORT SIDE
Hanesbrands (HBI): Already top on our Best Ideas list, our conviction on HBI short-side has strengthened recently, particularly not that the company is sans CFO. Numbers next year look too high by 20% due to outsized decremental margin in C9 (which goes away in a month), share loss in the core, and momentum evaporating at Champion. Replay of our HBI Black Book from October Link: CLICK HERE
Peloton (PTON): Added to Best Idea List short side. Our research suggests that management’s TAM and SAM estimates are too high, competition is underappreciated, and the business model is too rigid and inflexible to handle the stalling demand that should happen after 1Q20. We’re presenting our Black Book on Dec 18th at 2pm. PTON | Adding to Best Idea List as a Short
Ralph Lauren (RL): Top of our short bench. The company sandbagged the upcoming quarter, but I think it has among the highest gross margin risk in 2020 in a post-tariff environment.
Williams-Sonoma (WSM): Growth is decelerating across all concepts, tariffs an issue, and margins looking stretched. Higher conviction short side at 10x EBITDA.
UnderArmour (UAA): We covered the at $16.50, but above $20 I start liking it again short side again. The problems at this company run deep. It needs to show real growth in 2020 to earn its multiple, and I take the under on that one any day.
Lululemon (LULU): Stock trades down on a 17% comp, as growth is peaking, gross margins are toppy, and SG&A and capex are accelerating on the margin. Simply put, returns are coming down. Nike had $16bn in revenue when it had LULU’s current market cap. LULU has $4bn.
Bed Bath & Beyond (BBBY): With a 90% rally off the August low over hopes that it can be turned around, I start getting interested short side again. It can’t be fixed by a chief merchant from Target. It has a pricing, traffic and customer problem, not a merchandise problem. This business is terminal – and now it has $2bn in cap to short again. Before I make any call here I need to be sure I don't get stuck on the wrong side of any asset sales. More to vet there.
Dick’s Sporting Goods (DKS): Things are simply unsustainably good at DKS right now. This latest quarter was pristine – even though cash flow was down 38% to drive the comp and gross margin. DKS might prove to be the last man standing in the Sporting Goods space when all is said and done, but with a lower margin profile. That matters at 11x EBITDA. Moving this one from long side to short side.
Nordstrom (JWN): Higher conviction short side. We covered this as a Best Idea Short at $26, and it’s quickly rallied back to $40 on a less than horrible quarter. While JWN is one of the few survivors in the dept store space, I’m interested short side again with a 4-handle.
TJX: Removed from short bench. I’ve been frustrated by the Street’s love affair with this name – awarding it a premium multiple despite sub-par comp and earnings flow through. But in 2020 comps are likely to accelerate as the Ralph Lauren’s, PVH’s and Macy’s of the world need to find a home for displaced merchandise. I wouldn’t own TJX – would put my money with BURL – but wouldn’t want to be short this one in that environment.
