Two changes this week to our Position Monitor…
Ralph Lauren (RL): Ralph sits on our Best Idea list short side due to our view that the brand is tired, and that management is underinvesting in the core IP – making sustainable long-term top line growth a pipe dream for RL. As such, long term earnings expectations are too high, and the stock is more expensive on real underlying earnings than the multiple suggests. This is a company with $5 per share in recovery earnings power, which compares to $7 pre-pandemic. The long term earnings power is permanently damaged. Over a TREND duration, the early Nov print is going to have to come along side a guide-down, as Street expectations are too high for this year. The stock worked alongside the PVH print – but PVH is a company we’d consider owning (would definitely pair it against RL at these prices) as its brands (Calvin and Tommy) have considerably more momentum and have a more healthily positioned than Ralph. A better peer for RL is OXM (Oxford Industries) which owns brands (Tommy Bahama and Lily Pulitzer) that are under-invested in and face similar challenges as RL. The company just guided down the Dec quarter materially, and RL actually traded up in that context, which makes no sense. My only concern is that Short Interest is ~12% of the float, which is a critical level for us at Hedgeye. But ultimately, I think that the model will prove the shorts right, and then some. This stock is worth 12x recovery earnings of $5, or $60 vs the current price of $78. We wouldn’t own it until the stock price started with a $5-handle – and even then would do so nervously given the secular challenges that face the company.
Ulta Beauty (ULTA): Adding this one to our Short Bias list – for the first time. While I like the secular share-shift from Department Stores to Ulta in cosmetics, I think that the more-powerful shift in the business mix to ecomm in a post-covid world will prevent margins rebounding next year to the magnitude that the consensus is currently modeling. ULTA will be lucky to earn $10 per share next year, and the Street is clocking in at $10.73 (vs $3.50 this year and $12 pre-pandemic). That’s not a huge delta – but enough for us to weigh in short side with the stock currently trading at 28x earnings, 16x cash flow and just 5% of the float held short. We’re going to dig deeper into the model and debate on this one. Will need to see a meaningful earnings driver in 2021 that we don’t currently see in order to make us back off the short side.
