DUFN-CH | Adding to Best Idea Long List. Mother of all reopening plays. Multi-year multi-bagger. More upside here than we originally thought. Black Book Deep Dive on 3/30. At today's CHf 63.50 price, you're buying the name at sub-5x earnings, 2x EBITDA, and a ~40% FCF Yield. Simply put, it's a business that is moving upscale much the same way RH is building a global luxury home furnishing brand, but this business has the benefit of a) customers that are literally locked in the store for an hour, b) ZERO Amazon competition, c) being a globally diversified monopolist in each market in which it operates across multiple retail formats. In other words, it's a dominant travel retail luxury consolidator with fierce barriers to entry that is trading like a poor quality beaten-up share-losing US apparel retailer. The economic disconnect between where the stock is trading and the ultimate value we expect Dufry to create is astonishing.
GPS – Taking Lower on Short Bias List. Rate of change is going to start to improve imminently lapping easy compares. Merch margins in apparel have been very strong given lean inventories. GPS is seeing inventories up at +14% with sales down 5% for 4Q, the question is will that be a margin risk or a share gain opportunity. Given lean competitor inventories, it could be the latter for the spring. We’re coming in well ahead of the street on ’21 EPS as well, at $1.80 vs the street at $1.30 (where management guided), and gross margin upside being the big driver. Should GPS trade at 17x our EPS? Probably not, but we don’t see a catalyst that’s likely to change the multiple or pressure earnings expectations over the next 6 months. At the same time management is exploring some strategic actions of franchising Europe and selling China, which could be viewed as a positive and potential cash return opportunities. Tail setup is still bearish relative to where expectations appear to be, but trend is looking more bullish.
ULTA Staying Short Despite Last Week’s Blow Up. We’ve been short ULTA in part because we thought that 2021 numbers needed to come down by 10-15% -- and that’s precisely what the company guided on the earnings print last week. But the company also announced a shocking CEO transition with Mary Dillon moving to an Executive Chair role for a year before leaving the organization. She’s been at the helm of ULTA during its meteoric rise over the past 8-years, and we view her stepping down at the age of 59 to be extremely bearish. Couple that with our view that the company’s store growth targets are too lofty, and it is entering the tough years of unit growth that will likely challenge productivity of existing stores – especially with its’ new partnership with TGT (which we think is much better for TGT than ULTA). The company finally has hittable EPS estimates out there, so this is not a Best Idea Short, but we wouldn’t touch this name long side at 32x forward earnings and 19x EBITDA given the slowing secular growth profile and a head-scratcher of a management change. We’d be buyers below $250 (it’s at $318 today).
