Two changes this week...
UAA: Taking UAA higher on our Long Bias List. One step closer to being a Best Idea Long. The reality is that this brand has been left for dead. If you look at the company’s Apparel sales in the quarter – down 6% -- that rings true. But I was definitely encouraged by the 19% increase we saw in UAA’s footwear business in the quarter reported on Friday. Footwear is a far more defendable business that apparel, and UA is seeing progress in that corner. We still have consolidation in the apparel part of the business, especially with the announcement that the company taking down its distribution in the US from 12,000-13,000 doors down to 10,000. Its doing the right thing. We’re also seeing off-price going from 10% of the mix down to 3-4% in 2020. These are massive signs of a brand bottoming and making the right moves to re-ignite a growth wave. Do such moves take time? Yes, of course. But they support that that the company has finally made the right moves toward returning to positive EPS beginning in 2021. With the sale of MyFitnessPal it nets an incremental $345mm to help repair its balance sheet – which needs all the help it can get. The only thing I don’t like is that just 11% of the float is short – the lowest level in five years. But if the company hits our revenue estimate for this year and next, we could argue that that the SI ratio should be much much lower.
GOLF: We’re taking this one down from Best Idea Short to Short Bias. Tough call, but taking a black eye on this one. While the short has been working since the July peak, in looking at the street outlook for 2H, expectations seem too low relative to the recent data points we have seen. After a 35% decline in 2Q, we expect at least some of that to be recouped in 3Q. Golf rounds have exceed our expectations for the year, with July, August, and September all ~20%+. That rounds growth isn’t likely to correlate perfectly with GOLF’s sales, but with the street expecting sales declines for 3Q and just 5% growth in 4Q (partially from club launch timing shift) it looks like an overly low bar. We also had Golf Datatec indicating 3Q equipment sales were up 32% industry wide, and ELY announced 12% revenue growth a couple weeks back with sales recovery in both equipment and soft goods exceeding its expectations. So the fact is that near-term datapoints look good. But the stock is trading at 25x earnings and 14x EBITDA – which is near peak on an even depressed earnings stream – with only 7% of the float short (near trough). As we look at the Tail call, we still think what matters is the state of the US economy over the next few years, which we think is more likely to be recessionary than growthy, and whether or not Covid-19 has driven a multi-year change in golf participation, which there does not appear to be any evidence of to date. Tail expectations imply sales above the economic/consumer peak levels of ‘18/’19, so if we see the stock at similar or higher valuations as we approach mid 2021 perhaps we’ll revisit this as a Best Idea short side.
