Two changes this week to our Retail Position Monitor...
GPS: Gaining conviction short side. We don’t buy the resurgent bull case that’s been circling for GPS. As the stock continues to grind higher we continue to gain confidence the other way – as GPS is setting up to be a nice short. Looking across retail sales results apparel stores are by far the worst performers and apparel seems to be a category lagging much of the rest of consumer. Back to school is off to a bad start and apparel/footwear retailers are looking to get promotional in 2H to try to spread out demand vs struggling to handle peak volumes around holiday. The shift to e-commerce is very bad for the Old Navy concepts that carries a low average basket, meaning online shipping created big dilution. GPS is one of the biggest tenants in retail shopping centers at a time when malls and strip centers are seeing their worst position in years. There will be mall closure risk and co-tenancy risk for many locations. Then there is credit GPS had about 40% of 2019 EBIT coming from the revenue share in its credit card portfolio with Sychrony, bad debt hasn’t become a big risk yet, but KSS saw credit down 24%, DDS saw it down 18%, and TGT saw it down 6% despite 20%+ comps. Credit for GPS should take a hit in 2Q and have even greater risk in 2H as government benefits/stimulus reduce. Lastly with that fundamental pressure the company also added more debt this quarter, which we think will mean pressure on equity value as we don’t see a rapid cashflow recovery.
FL: Still Best Idea Short – though upside/downside looking more balanced. Taking this one down a notch on our Best Ideas list. On one hand after revising our model in the wake of last week’s quarter we took down our TAIL earnings expectations, and now sit 30% below consensus. We have the earnings stream sitting between $2.75 and $3.00 over each of the next three years, while the consensus is marching up to $4 per share – hence Best Idea status given our expectation for downward revisions. On the flip side, this stock is definitely not trading on consensus earnings estimates. At $27.50, the name is trading at just 10x our beared-up numbers, which assume that the model delevers as the brands like Nike accelerate the shift to DTC and away from wholesale accounts like Foot Locker. If we’re right, then this name could trade at 7-8x earnings, which is about $8 downside in the stock. If the Street is right, then 12x $3.50 next year gets to a stock nearly $15 higher than where it is today. Obviously, we trust our model and are sticking with the short idea. But the risk/reward is looking more balanced with the stock in the high $20s.
