1. Hanesbrands (HBI): Moving lower on Best Ideas Short list. Short playing out. Stock down 25% over the past month in the wake of a disappointing 3Q print. New CEO doing the right thing in recapitalizing the P&L by investing in R&D and Marketing, but that will take earnings power next year below consensus. There’s still 20-30% downside here, but risk/reward is looking more balanced.
2. Target (TGT): Removing TGT from Short Bias List in the wake of the ULTA/TGT partnership. Win for TGT. But what is ULTA thinking? This ULTA/TGT partnership to add 100 ULTA Beauty Shops inside Target is a home run for Target. Well played (CEO) Cornell. TGT continues to find innovative ways to drive and innovate the guest experience, and ultimately, keep comp momentum going. While the initial test is for 100 shops plus online, both companies said that they have plans to scale to ‘hundreds more.’ Target will own the space, sales and inventory, with ULTA being paid via royalty. The new concepts will be about 1000 square feet and brand assortments will focus on key SKUs from 40-50 brands. Again…congrats TGT. Ulta, on the other hand, is making a big mistake from how we see it. Could it pull this off with 100 stores and no web presence? Probably, and could likely do so profitability. But it will be online at the start of the partnership, and the expectation is for ‘hundreds of more’ shops in Target stores. This has cannibalization written all over it. There’s definite overlap between the Target and Ulta shopper, and with the secular trend towards consolidating shopping trips, ULTA will see less traffic at its stores on the margin as people simply shop at TGT. One rationale for ULTA doing this might be that Sephora otherwise would have done it with TGT as the 700 locations inside JC Penney stores are in question with their fate of those stores up in the air as JCP exists bankruptcy and likely executes a controlled closing plan (‘controlled’ meaning closing them at a set cadence so all stores don’t go dark at once). But if that’s true then that suggests that this was an offensive move by TGT and a defensive one by Ulta. Didn’t Macy’s try this with Finish line several years back? It was good for Macy’s athletic business – but did nothing for Finish Line. We have ULTA on our Short Bias list, and this partnership further limits its already challenged square footage growth plans. It makes us more bearish on the margin – the exact opposite of how the market priced ULTA on the announcement.
3. Wayfair (W) Moving Wayfair up to the #2 slot on our Best Ideas Short list.
4. Callaway Golf (ELY): Taking ELY off short bias. The golf industry has made a much faster recovery than we expected and with rounds showing some of the best months of growth ever there is a lot of optimism around longer term growth prospects. We’re skeptical of the Tail bull case, but if it does turn out to be the reality, ELY is arguably better positioned to capture share of new golfers than GOLF. ELY also saw a big sell off from the implied dilution of the announced TopGolf acquisition. We’re fans of the TopGolf company, as its one that is innovating and investing around golf entertainment better than any other in the industry, and its offerings extend well beyond the large scale range experience. The deal could turn out to be a good move for ELY. In its presentation this week management highlighted an opportunity of $1.27bn in segment level EBITDA for the current Top Golf business units over the long term. That would make the $2.5bn price tag seems like a steal, but there is a lot of time, execution risk, and competition before that kind of profit will be recognized. Not to mention recovering from the global pandemic that is clearly getting worse in terms of case counts in recent weeks. When Top Golf business is clearly recovering perhaps it will be a moment to be long ELY, but for now it’s off our short list.
