Taking MIK higher on the long bias list. The setup for MIK here resembles what BBBY has seen over the last few months. MIK is trading at just 5x EPS, with very high short interest (44% of float is short), leverage and with a catalyst of a strengthening category. MIK management also set a low bar for near term (by saying nothing) and long term expectations (with 1.5% to 2.5% sales growth) at its virtual analyst day a couple weeks back. We’re not bullish on BBBY like we are for MIK, as BBBY is still losing share and we are not sure its fixable long term, but riding the wave of category acceleration BBBY got a huge revaluation when earnings were better than expected. Like BBBY, MIK has a new management team working on turning around the business, and whether it’s execution driven, or simply from category strength, a quarter or two of solid performance for MIK will convince the market that it is significantly undervalued. We think MIK will be around for the long term, and its business will be improving as fall home décor/decorating demand remains strong and demand for crafting and other inside activities grows as US households shift their entertainment from doing stuff outdoors to indoors when winter approaches.
BBY added to short bias earlier this week. As we dive in on the setup for retail entering 4Q 2020, two hot categories stand out as seeing slowing risk in the coming quarter or two. Those are sporting goods and electronics. We already flagged DKS as short bias, BBY is another one that we think has priced in the positive momentum and now should see earnings risk and multiple compression as sales slow. The replacement cycle for laptops, TVs, monitors, tablets, and other quarantine video consumption and learn from home items will be several years. Demand has been pulled forward leaving a 2021/22 air pocket. Sentiment on BBY does not reflect the potential for weakening demand, as it is trading near peak valuation metrics (16x eps, 9x EBITDA) and at 20-year trough short interest (2% of the float).