Two changes this week to our Position Monitor -- RL and BBY...
RL – Removing from Best Idea Short list and adding to Long Bias. We’re generally bullish on the apparel space in 2H21 due to our expectation for a snap back in apparel spending, which is likely to come at peak Gross Margins (driven in part by lean inventories, as well as the consumers’ willingness to pay up for closet re-stocking), and for many companies – it will be layered on top of a reduced SG&A and operating asset infrastructure, which will result in outsized earnings leverage. This thesis is best represented in our Long JWN call (where we have recovery earnings of $5.21 vs the Street at $1.70), as well as our bullish stance on RVLV. But the reality is that RL fits into this mold perfectly. Let’s be clear – over a TAIL duration, I think this company has severe structural problems. The brand is broken, and while management is doing the right thing to reduce off price sales and boost AUR (average unit retail) on a global basis, we don’t think it’s investing enough in marketing and branding to create a ‘pull model’ whereby the consumer buys the product because he/she views Ralph Lauren as a leading fashion brand. But in a recovery environment, this likely won’t matter. The rebound in earnings is likely to be ahead of the $6.41 consensus estimate for next year, and under a bullish scenario we can get to something closer to $8.00, which includes about $2.00 per share in SG&A cuts alone. To be absolutely clear, realizing that EPS power would be a great short opportunity, as we think it’d revert to a lower earnings number as the top line falters in year 3. In the interim, if we’re right on the $8.00 number, RL would likely get a high teens multiple on that earnings level – which could make the stock push $130-$140 – respectable enough upside from the $101 level it trades at today.
BBY – Gaining Confidence Short Side. We’re taking BBY higher on the Short Bias list. We added it to the short side in early October ago and the stock is down about 10% since in an up market, but we think there is more downside in this short. BBY has been benefitting from the general wallet shift to the electronics category in 2020, as many services/experiences have been unavailable and out of favor in 2020 during the pandemic. Within the strongest goods categories, BBY has seen some of its core products like home computing, home theater/entertainment, appliances and fitness equipment, all getting high demand as consumers invested in the home and home schooling. The replacement cycle for appliances, 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 which will be at the same time consumers will shift wallet back to service/experience consumption. The bull case is around new gaming systems and 5G phone tech, but we don’t think the upside from those will be enough to offset the air pocket in other categories. There is also a high level of exposure to credit card income with little disclosure on the subject, which is a hidden risk should the unemployment trends ever lead to a real consumer credit problem. With the pull forward in demand, the Street is still expecting positive comps in 2021, peak margins, and flattish EPS. While not overly bullish, that still looks overly optimistic given the growth comparison setup and incremental wage pressure YY. Short interest is at all-time lows and while we’ve seen multiple contraction since we first added this short-side, its valuation is still not discounting the risk that we see to NTM earnings expectations.
