Editor's Note: Below is a quick flashback on our short Hanesbrands (HBI) and long Capri Brands (CPRI) research calls from our Retail analysts Brian McGough and Jeremy McLean. CPRI reported earnings and crushed consensus today. HBI? Not so much...
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Capri Brands (CPRI)
Hedgeye Retail (10/25): We‘re adding Capri (CPRI) to our Best Ideas Long list. For those that follow our work closely, you know that we don’t take the ‘Best Idea’ designation lightly. We’ve had this one at the top of our Long Bench for the better part of six months, and the stock is up 50% over that time.
But that’s chump change…there’s much more to come. This is a name that I think can triple over a TAIL duration, coming from earnings growth, multiple expansion, and one of the best cash flow and de-levering stories in retail. Here’s the call…
The stock is trading at both 12x earnings and EBITDA – using depressed earnings and cash flow levels – at a time when other retail models are trading at 20-30x on depressed metrics. We think you get paid 2x with zero multiple expansion simply due to the top line growth and margin expansion in the model.
But when you factor in the deleverage and increased focus on luxury assets accounting for a greater proportion of the company’s cash flow, then you get to a high-teens multiple on $4-$5 in EPS, which gets you to a 3-4-bagger from where we stand today at $22.50. If we’re early on this one and the company’s growth algorithm comes in below our model on the Nov 4th report, we think you’ve got at worst $5 downside. So there’s $60 upside, and $5 downside – find me that anywhere else in retail today.
Hedgeye Retail (07/30): We weren’t expecting that normalized earnings in 2021 could actually be down from 2020, but that looks very possible now, rate of change bearish. There are some bullish data points, and some bearish in the print, but in aggregate the positives were likely priced in heading into this event.
Taking a step back, US underwear in the last recession slowed 1000bps, contracting about 2.5% in ’08, and 3.5% in ’09. With such power stimulus this year, perhaps next year is the one to be worried about as it relates to consumer health and ability to consume. Why shouldn’t we expect a multi-year contraction in underwear in this recession?
Our estimates are going up a lot for 2020 (modeling an extra $650mm in PPE will do that), but for the wrong (non-investable) reasons. 2021/22 moving up just slightly. Fair value $8-$10, downside to $5.