Best Idea Longs: Names on this list need to have high confidence in hitting or beating consensus estimates – simply ‘hitting’ is good enough in most instances given our view that 90% of retail estimates are too high. This includes names like COST, WMT, CHWY and DLTR – also names that should emerge stronger and/or more dominant post-Covid.
- COST: Expectations are relatively high headed into earnings this Thursday, but comps are already known, and disappointed in two of the last three months due to the effect of social distancing. COST is perhaps the most defendable model in all of retail outside of AMZN, and benefits from the pantry-loading factor that should be a permanent change for consumers in a post-Covid world.
- WMT: In the latest quarter, WMT EBIT was up 6% on a 10% comp, while TGT was down 60% on the same 10% comp. The investments that Doug McMillon made 4-years ago in e-comm infrastructure are paying off today. It’s at 24x next year…vs TGT and 23x. One of them is eggregiosly mispriced... While I think the answer is TGT, I still like WMT long-side.
- CHWY: We’ve been positively predisposed to the name since the June IPO, but the current environment is about as good as it can get for CHWY. People won’t stop feeding their pets, and the retail economy is rapidly shifting penetration to online, likely with permanence. CHWY sells a better basket of brands than Amazon, and service is arguably better. Unlike Wayfair, which needs to reacquire each new sale, nearly 70% of CHWY sales come from its auto-ship program, giving it a highly recurring revenue stream. The company is not profitable yet, but there’s growth optionality as the company becomes a ‘pet portal’ and offers products and services like grooming, insurance, and pet meds – which could land the company in the black over a long term duration. This is one of the poster children for a company that will emerge from this crisis stronger than it went in.
- DLTR: Family Dollar might be only 10% of EBIT, but it sells necessities and is likely comping today. Dollar Tree is less essential to consumers’ daily needs, but the concept has a major opportunity in ‘breaking the buck’ with the Dollar Plus+ test which offers price points up to $5. This is worth $2-3 per share in earnings. Fixing FDO – even marginally – is worth an extra $2 in EPS. Not many retail concepts with the optionality of DLTR.
- NKE: Digital sales are accelerating to +triple digits, and while only 7% of NKE total volume, could be 20-30% and carries 2,000bp higher margin. The pandemic accelerates this trend for Nike-direct. Needs another guide-down, as current estimates of $2.70 for next FY are too high by 5%. But largely in the stock today. We’re buyers on weakness.
- GIL: The competitive set can’t weather the current retail climate, making GIL even more dominant today than it was going in. To the extent that the basic cotton T-shirt has any utility in the post-Covid economy, GIL is a raging long today at $13.
Long Bias
- RH: Next quarter estimates are definitely too high, and at $150 I could stomach that with RH on our Best Idea list. But at $198 it’s a different story. Maybe that’s splitting hairs for a name that I think will be a $300-$400-stock over a Tail duration. After all, 70% of sales in the high-end furniture space are transacted by Mom and Pops that won’t exist in another year. But I’ll be patient on this high-conviction research call.
- CPRI: Might very well be the cheapest stock in retail. If you believe, as we do, that this pandemic will help rip the band-aid off of the core Kors business in US Wholesale while accelerating growth at lower cost in Versace and Jimmy Choo, then you want to be buying on weakness. At $15 this stock does not appear to be discounting the $5 in underlying earnings power that we see in our model.
- DOL-CA: Call option on shifting entire mix to a $4.50-$5.00 price point. The sourcing organization is locked and loaded, just needs the environment to allow it to move, which will be a multi-year comp and EPS driver.
- TJX: The most dominant and defendable model in apparel. Further guide-downs unlikely. Expensive, but worth it.
- AMZN: Co likely guided to a beat in both core Amazon.com and AWS. Too rich and not enough controversy for a Best Idea, but a good safe place to hide.
- BURL: It’s a TJX plus optionality on square footage growth and margin improvement. It’s expensive, but it should be.
- UAA: I’ve been a long-term bear on this one, but it’s starting to look bullish to me at or under $8. There’s $1.00 in underlying EPS power. The second I gain confidence that the footwear business is #accelerating, then this name is a home run.
- NLS: Benefitting from the ‘exercise at home’ phenomena like PTON, but to a lesser degree. Meaningful acceleration – a sustained one – to the extent you can go down the cap curve.
- CRI: Starting to warm up to this long side after being negative for years. It's less discretionary than the majority of apparel. It's a brand the wholesale channel will want to carry as much of as possible. A shift to eCommerce is net bullish for margins. And maybe there is a Covid-19 baby boom coming starting around year end. Expectations too high near term (especially as wholesale channel resets), but looking for a potential time/price to be long this one.
Best Idea Shorts
- KSS: Overtakes HBI as our top short for the first time in years. The reality is that people are underestimating the impact on the company’s powder keg of credit income on earnings as its core profit center shows signs if stress. EPS -75% from current consensus.
- HBI: EPS 50% too high across the board. Champion just lost out on it’s last full price selling season.
- PTON: We’ve been dead-wrong on this one, and Covid-19 has accelerated the model. But the reality is that the core connected fitness model is worth about 1/3 of where the stock is trading today.
- FL: Yes, it’s cheap, but the reality is that the forward earnings stream accrues to NKE, ADS and the other vendors. Any comp FL gets out of this on a 12-month forward basis is sheer luck.
- GOLF: * Restricted
- MNRO: One of the biggest losers from the what we see as a significant headwind to auto repair/maintenance demand via miles driven and implied vehicle wear from mobility patterns post Covid-19. Business was already faltering pre-Covid as it couldn't comp within its roll-up strategy. Management is a concern losing CMO last month and the operational 'turnaround' seeing minimal progress to date.
- RL: In an ideal environment, this name grew at 2-3%...now it’s looking at -2-3% in a best-case environment. Not a bad brand, but not one that should show any investable growth characteristics. Needs a big guide-down on Wed, without which it’s even more shortable.
Short Bias
- W: The poster child for the kind of name that is benefiting from Amazon and other Home retailers shifting focus away from actionable parts of the category. Big revenue acceleration, and up 150% from where we covered. But W starting to look interesting again…big time.
- KTB: Company set 2H EPS at $1.50 or better…should have come in below $1.00.
- TGT: Note inverse of WMT comments above. Company has invested in the wrong arm of e-comm. Digital up 150% and EBIT -60%. Simply not scalable.
- WSM: Pair this one against RH. Being above $5bn in market cap while RH is struggling to stay above $3bn is a great long-term trade.
- AAP: Miles-driven expectations are far too optimistic over a TAIL duration. AAP and MNRO are the best plays here short side.
- BBBY: Terminal. ‘nuff said.
- AZO: Even though credit card data called this quarter’s upside in DIY demand, expectations are too high re recurring demand. Short.
- TSCO: Valuation is stretched for what is a good long term business. We have concerns economic pressures and the migration of Covid-19 to the rural areas could mean comp misses in the next few quarters, which is a risk with stock at 4 year highs on P/E.
- RVLV: On paper, this is a solid long, unfortunately, it does not live on paper. It’s evolved into a discounting mechanism for premium brands, which is basically the department store of 20-years ago. This model could have been dominant, but it took the discounting road that will lead to its obsolescence.
- GPS: Too many stores, expectations too high, too much credit risk.
- ELY: Despite what management says, golf is a highly cyclical business. The industry was just starting to recover from the 2008 recession, and now Covid-19 will be another secular shock driving players away and closing courses/distribution. It lost the intermediate term catalyst from Top Golf IPO, and has less downside support from it as we'll have to see how that business recovers.
- SFIX: The fact that this business model still has $2.4bn in Equity Value is astounding. It’s run out of Tam at least 3 times, and yet it’s still breathing.
Notable Names Removed from Long/Short List
- L Brands: removed from long bias list – it needs a deal to survive its leverage. Sycamore was nice while it lasted.
- GES: Still big optionality on this one, as current 4% EBIT margin could see 10% under new leadership, but Covid delays that by 2-3 years.
- VVV: Was a best idea long last summer, but now its seeing significant demand headwinds from miles driven while management's commentary has kept expectations high and it laps helpful initiatives in Core NA. If we see numbers come down perhaps we'll again be long this name which we think is a huge share winner in DIFM oil changes over the long term.
- TPR: We like this long term, but the reality is that estimates are still 100% too high over a TAIL duration.
- M: At this price it’s a question of ‘live or die’. The reality is that Macy’s is probably gonna live, albeit at a smaller size. Off short bias list.
- BBY: Can’t find enough in the short call to offset the 5G bull case. Off short bias list.
- DKS: Survivor in a defendable category. Can’t get too greedy on this short.
- GOOS: I’d actually want to own this name at a price, and $20 is getting pretty damn close. No longer a short.
