Changes on the margin:
Bullish. DLTR now highest conviction long. Moved Nike higher on conviction list. Took RH down a notch due to potential demand shock. Added UAA to long bias from short side, which might be a sign of the apocalypse for me. LB and DECK both added to Long Bias.
Bearish: Higher conviction on PTON short. Moved RVLV to short side from long bias. BBY higher conviction. Added CRI, SIG, SHOO to short bias. Removed Wayfair from short side. It’s approaching a price I’d be interested in owning it when we have some visibility on revenue acceleration.
BEST IDEAS
DLTR: It’s very difficult to build a cohesive bear case on DLTR given incremental push to break the buck at Dollar Tree, and now the buying organizations are pseudo merged, which finally helps FDO dig out of its’ hole. There’s an incremental $3 in EPS from a successful buck break, and another $3 in fixing Family Dollar. We only need one of them to happen and this stock is a steal at $80. This name loves Quad 4. Our top retail long right now.
GIL: Will see a meaningful acceleration in sales and EBIT starting in 2Q20. Taking share at Retail with private label wins, while growing in high margin fashion basics with new capacity.
NKE: Has a hall pass on weak China sales over the next few quarters. While I don’t like the recent senior management change, we’re likely to see an acceleration in high margin DTC under new CEO.
DOL: The $5 price point is in play. It is not a question of if Dollarama raises prices and creates a multi-year comp tailwind – but when.
RH: I’m concerned about a demand shock given reverse wealth effect due to market selloff. But that’s at least partially in the stock at $167 (below where Berkshire started buying). Best long-term story in retail today outside of Amazon. Yes, I’m serious.
LONG BIAS – notable callouts
CPRI: One more guide-down away from our ‘back up the truck’ level -- and at this price even that might not matter. The cheapest quality name in retail today – with Versace growth and accretion in the back half of this year as a catalyst.
FIVE: Morphing into $10 Below as it does what DLTR should be doing more quickly – offsetting inflation by going higher in price. One of the top three square footage growth stories in retail.
BURL: New management closing the productivity and margin gap between it and industry leader TJX. Currently managing to tight inventories to drive turns, improve markdowns and leverage op expense.
Adidas: Similar story to Nike with DTC play and margin optionality, but at nearly half the cash flow multiple.
Puma: Now that it’s outside of Kering’s umbrella it can control its own capital plan and destiny. I’ve been concerned about spending levels, but it’s been resulting in high quality growth. No reason to think that will change.
UAA: A possible sign of the apocalypse, but I moved UAA to the long side of the ledger. At this price, I think the fact that it has $1 per share in underlying earnings with accelerating growth in 2H matters.
ORLY: Back on our long list after a 20% correction. Weather hasn’t been great for the space, but I like buying quality businesses when Mother Nature doesn’t cooperate.
LB: Now it’s just Bath and Body with a $2 call option on Sycamore doing anything right with Victoria’s Secret. At 9x underlying earnings (assuming appropriate dis-synergies with the spin), this name is worth supporting.
DECK: The consensus likes the growth at HOKA. I do too, but am more excited about the stabilization in its core Ugg brand – one of the most resilient footwear brands out there today. Inventories look good despite rough boot season.
AMZN: Came through investment cycle in 1-day and AWS faster and stronger than expected. Keep in mind that AMZN does not like Quad 4, and it’s one of the most loved stocks on the planet.
GES: There’s a clear path to margins doubling to 8-9%. My chief concern right now is it’s over-exposure to Italy – which is being affected with Covid-19 concerns. But stock off 30% YTD.
VVV: We booked a gain on this one 20% higher, but in the teens the prospect of separating VIOC from Core North America makes sense again. VIOC is a good defensive late cycle business, comped positive in the last recession with low discretionary exposure.
OLLI: Defendable unit growth story that’s off 50% from its highs. Can’t catch a bid since passing of the founder. The story isn’t broken even though the stock is bruised and battered.
BEST IDEA SHORTS
HBI: $5 is in play if Champion goes negative this year, which is becoming increasingly likely with coronavirus concerns (after all Champion Europe was a predominantly Italian business with direct retail exposure when acquired). Company is losing share in the core faster than it can lower expectations.
KSS: Sitting on a powder keg of credit income – while core retail business wastes away. Not cheap until it has a Macy’s dividend yield (12%), though credit will crack in a downturn, and the dividend likely goes with it.
PTON: Great core connected cycling business, but one that is simply worth $2-4bn. Company TAM estimates are pie in the sky, and digital strategy is flawed. Unlikely to earn a red cent over a TAIL duration.
FL: I know its cheap, and the call has worked out, but Nike’s new CEO will accelerate the rate of change in going around FL with premium product to sell direct. FL was built to be cheap. I’m keeping this one on a tight leash.
OXM: Crown Jewel brand (Lily Pulitzer) is overearning, company is overexposed to wholesale channel. Stock is off with market. Appears cheapish—though the ‘e’ is wrong.
SHORT BIAS – Notable callouts
RL: Has the growth characteristics of a share-losing CPG company. The brand needs massive investment to regain relevancy with a new generation of consumers.
WSM: Growth decelerating in its only growth engine – West Elm. In Wayfair’s crosshairs. Can’t buoy margins with SG&A cuts forever.
BBY: Bulls hanging their hat on the 5G cycle. But that’s in estimates, and ultimately BBY is structurally challenged to grow EBIT dollars (as evidenced by this past quarter) and is acquiring questionable businesses to move the needle.
BBBY: Not fixable. The activists picked the wrong fight. This is a hybrid stepchild of JCP and Pier 1. It’s run by a new merchant CEO – but does not have a merchandising problem. It has a pricing, discounting and value proposition problem.
VFC: Growth slowing in Vans, and stock is both flat-out expensive and under-shorted.
JWN: A survivor in the dept store space – a rarity. But even with new NYC store latest results underwhelmed. Margins have been cut in half from 10% to 5% over 5 years, and the over/under is that they get cut in half again over a TAIL duration. LBO off the table.
CRI: Declining birthrate, overstored, no longer gaining share in core baby business, and still heavily reliant on pressured wholesale business. The right margin rate is ~HSD vs 10.5% today.
SHOO: Almost entirely sourced in China, where as of last weeks print, factories were still only running about 30-35%. Tariffs have also still not been fully resolved.
SIG: One of the most poorly positioned retailers in the mall. This one is near the top of the ‘going to zero’ list.
GOOS: We covered this Best Idea Short at $30, as our call had played out (from $50) and the latest guide down bought GOOS some time. But the company still has issues with SKU proliferation and sustaining a luxury margin when it’s not a luxury brand. I want to short it again on strength.
RVLV: Moved this one from Long Bias to Short side. Management turned a great business model into a big online department store. It should be curating product for and by influencers. Instead its discounting nearly the entire site for the masses. 8% margins not sustainable under this scenario.
GPS: The Old Navy spin isn’t happening because it would be too costly to separate two weak brick and mortar apparel business for no actual stock upside. Now you are left with secularly pressured businesses seeing some door closures with high mall exposure where co-tenancy and Covid are real risks for traffic in 2020.
GOLF: Golf equipment is not an 11% steady state margin business, GOLF is over earning. After a consumer ramp, a leveling off of golf participation from prior decline, and several years of outsized golf equipment spending, we think sales are now likely to underperform expectations and drive deleverage in the P&L.
TGT: Focused on B&M as a way to fend off Amazon and WMT. Credit for blazing its own path, and it’s worked initially. But not a viable long term model at 6% margins. 1Q looks very doable, though 2Q and 3Q look like a stretch.
KTB: VFC spun off the dog for a reason. Simply not a good business. In the end, it’s a Wal-Mart denim brand that’s a price-taker faced with private label risk.
