Two changes this week...
1. Taking PLCE a notch higher on our Long List. When we went long PLCE on January 18th at $57, we said that there was 60% upside to $90. With the stock at $81, we’re 2/3 of the way there. But we think that business is trending better than even our above consensus model is suggesting, and now see upside to ~$110. As a reminder, the call here is that after 4 years of being kicked in the teeth (Toys R Us/Babies R Us filed, Gymboree Ch 22, Justice filed), the kids space has finally rationalized capacity, and PLCE has been aggressively closing mall-based stores to minimize exposure to money-losing dinosaur distribution. By the end of this year, only 25% of its business will be mall-based, with the remainder being strip-mall and e-commerce. We think that 1Q is running particularly strong for PLCE, and our estimate of $0.65 per share vs the Street at a loss of $0.19. For the year we’re coming in at $6.04 vs the Street at $3.92. The crux of it is that we think the Street is missing the full price selling due to a more rational competitive landscape, better distribution mix, stimulus, and the reopening cadence. Add on the child tax credit and stock repo in 2H to boot, and you’ve got this company marching towards $10 in earnings power over a TAIL duration vs the Street topping out at about $5 per share. The stock looks egregiously expensive at $81 – 21x the consensus FY number. But simply put, the Street is wrong. Though short interest is lower than when we first made this call, it’s still in ‘hated’ territory at 22% of the float. Putting a 12x multiple on next year’s number gets us to a $110 stock, which is 36% above current levels.
2. Adding Big 5 Sporting Goods Short Side. This stock has been an absolute beast over the past year. It’s a 430-store sporting goods retailer based predominantly on the west coast, and pre-covid had extraordinarily volatile earnings with EPS ranging from -$0.20 to $1.25. It was a ~$4 stock with $0.40 in EPS pre-pandemic. Then it rode the wave of the sporting goods space, and put up a monstrous $3.74 over the trailing 12-months. To be clear, this is not a quality retailer like DKS, and does not have margin drivers like ASO. It’s also by no means a take-out candidate. Beginning in 2-quarters, this company faces huge sales and gross margin compares, and at $30 the market currently thinks that the company will comp the comp. The trouble is that in Nike’s effort to clean up distribution and focus on its own DTC as well as only quality third party distribution, it is cutting BGFV off completely in the fall. Only one analyst follows this name, and has estimates of $2.41 a year after reopening. We’re closer to a buck. To be clear, Nike accounts for about ~20% of BGFV’s softgoods business – which is its profit center. The best earnings year in 5-years pre-pandemic was $0.77 ps, and that INCLUDED Nike. What happens when the company has to backfill shelf space with Reebok, New Balance and private label? Comps simply can’t hold up. If we give this name the standard ‘junk-tail’ 10x p/e multiple and apply to $1.00 in EPS, we get to a $10 stock, or 70% downside from current levels. Short interest is high-ish at 18% -- though it’s worth noting that historically it’s been as high as 65%. This name is priced for perfection, but without Nike, it’s anything but perfect.
