Hibbett Sports (HIBB): Adding to Short Bias List. If there’s one theme that was clear from last week’s retail earnings, it’s that Nike is pushing back on excess inventory on its retail partners, as evidenced by the gross margin weakness we saw at Foot Locker during the quarter. FL translated a 7.7% comp into just 7.1% earnings growth – that’s just not how healthy retail models work. We should have seen something closer to 20% EPS growth. HIBB still put up a healthy 560bp GM improvement during the quarter given the sheer magnitude of the company’s 21% comp. But it was a sharp deceleration from the 75% that we saw in 2Q. If there’s anything we learned from FL is that Nike does not care about how much its retailer print on the P&L. And last year HIBB ordered 70% of its inventory from Nike – which is likely to be closer to 80% this year, which is an unsustainably high level. We commented on Friday that FL is Nike’s best off-balance sheet asset…which is true. But arguably no retailer is more dependent on Nike than HIBB, and consensus margin expectations next year are for an 80bp increase in margin, versus a more likely 100-200 margin hit that we’re likely to see as Nike pushes back on inventory in order to keep the marketplace at a point of equilibrium. HIBB is being valued today 70% higher than pre-covid peaks, which simply makes no sense, especially given that covid is offering up a window for Nike to go around its wholesale network in favor of a more profitable consumer-direct e-comm model. People argue that FL is ‘cheap’ as it is trading at 3-4x recovery EBITDA. But HIBB is sitting here at 2x that multiple. I don’t like that 26% of the float is short, but that’s near 3-year lows, which have peaked as high as 43%.
Revolve (RVLV): Switching from Short Bias to Long Bias. First step toward adding this Best Idea Long-Side. There is arguably no better reopening play than RVLV, which is a classic play on higher-end online apparel spending. We’ve been short RVLV, rightfully so, as the company has been struggling to put up a positive comp as the core ‘fashionista’ consumer has shifted on the margin to ath-leisure, where RVLV has lower penetration and a weak positioning relative to its fashion core. Think of our call on JWN – as there will be a snap-back in spending on fashion apparel at the upper end – well, RVLV is JWN on steroids. We’d rather play JWN, which has a more defendable core customer base. But RVLV is the real leverage in this space, as it is a play on the millennial and Gen-Z customer spending on going out, clubbing, going to concerts, special occasions, and other events that were all cancelled in the depths of 2020 – what will go down as the worst year for fashion in the modern history of the space. Its too early to call a turn in the fundamentals here, as evidenced by the company’s horrible performance in its recently reported 3Q where it painfully missed on the top line and the stock traded down accordingly. The stock is still expensive to say the least – trading at 16x EBITDA and 28x EPS…but with 61% of the float short, we think that the negativity around the model is more than appreciated, and is arguably overdone relative to the snap-back we can see in demand upon a successful reopening. We’re not ready to make a bold long call (Best Idea) here yet – again, dipping our toe in the water with JWN – but anyone who’s bullish on a reopening should look no further than RVLV as it relates to making money long-side.
