We’re removing DDS from the Long Bias list. This call has worked, the stock doubled in Jan, and has dipped and then rallied back above $100 twice since. Our call here was that the fundamental improvement coupled with the high short interest, limited float, and persistent share repo meant a stock worth $90 to $100 with the potential to double. The street is still way too low on EPS for 2021, but with the stock trading at 36x consensus, the market seems to know the street is out to lunch. We’re at $7.70 with the street at $2.73. Free cash flow is high given property ownership (D&A well ahead of capex) so FCF per share comes in around $14. 3 important things have changed to make us no longer bullish here. First is the price, a low to mid-teens free cash yield is probably about fair for a business like DDS. Second, short interest is down significantly, it’s at 9.7% about one fourth the level of when we went long. Third is that we are likely around the peak rate of change in terms of real time sales trend, 1Q has a week left, the numbers won’t be reported for another few weeks, but 1Q will be the peak in rate of change terms, given the market knows the street numbers are wrong, we don’t think we can rely on earnings revisions from here to take the stock up. The fundamentals haven’t totally played out yet, but the trading side of the call has.
Moving CTRN higher on Long Bias. This has been a big winner, and we think it still has room to run. 2021 earnings per share is coming in well above our initial expectations of $3-$4. After the big 1Q guide up we’re now modeling this year at $5.60 vs the street at $4.85. The spending tailwinds have been clearly evident and we think the CTRN consumer is still in the early innings of a sentiment ramp given the leadership changes in Washington (ie expect more spending that will support urban development and low income citizens). Let’s also not forget that the Child Tax Credit is an even bigger boost to discretionary spending for many consumers than stimulus checks, and that hasn’t started being distributed yet. What’s the right multiple for a unit growth story, with strong cash generation for share repo, that can still have a 3 to 5 year 20% EPS CAGR ahead of it? We think at least low 20s, probably more like 25x. That puts a fair value on this name around $115 to $140. This is far from the total upside potential, heck Boot Barn is trading at 32x consensus. The company is just hitting $1bn in market cap and as one of the better earnings growers in retail today it’s still underfollowed and under-owned. Over a tail duration we see earnings power of $9 to $10, a $150+ stock is not unreasonable.
LB is still a Best Idea Long. Despite the run in the stock we still like the LB long here. The stock is up over 50% since we made our call, but the multiple has actually gone down. It’s been sheer earnings revisions driving the stock higher as the company had revised 1Q earnings guidance higher 3 times over a one month period. The sell side has gotten slightly more bullish, yet over half of the analysts still have hold ratings. The margin performance in 4Q was impressive, we think that momentum continues and earnings will continue to march higher at the same time we could see some multiple expansion given the separation catalyst still to come. It was in the news this week that VS is being shopped to private equity buyers, but clearly the company expects suitors to come with strong offers after the recent momentum. We think we’re looking at a bottom end value for VS of about $4bn, top end more like to $6bn. BBW continues to perform and we think this business alone can justify the entire EV of LB here, especially considering that the sell side and market seems happy to give retailers like ULTA a 30x+ PE and 18x EBITDA. We see current fair value for the stock in the $75 to $90 range, Bull case to $105+. This is a crowded hedge fund name, but it’s still cheap based on the earnings potential, free cash generation, and catalysts ahead. The point being there should still be plenty of incremental buyers.
