LONG-SIDE
1. PLCE should print a smoker this week. We’re at $0.65 ps the Street at ($0.19). When we went long PLCE on January 18th at $57, we said that there was 60% upside to $90. With the stock at $77, 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. The company reports earnings on Thursday 5/20. 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 $77 – 22x 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 40% above current levels.
2. TJX. Adding to long Bias List ahead of 1Q print. The biggest knock on TJX is that the MarMaxx division’s UK and Canadian operations are still shut down. But the fact of the matter is that the US operations are a secular winner and are the ‘go to’ places to shop upon reopening. We’ve got the company earning $0.47 vs the Street at $0.30. That compares to $0.57 in 1Q19 – in other words not unrealistic. Inventories are building in the US, and that accrues to the US TJX operations, as the off price model benefits from the bloated inventories of #Retail4.0. TJX is perhaps the only secular share winner long term aside from ROST and BURL, though TJX is clearly far better managed than any other models in the space. We think that $3.00 in EPS power is likely this year vs the Street at $2.37. 30x $3 = $90 today and $100 in 12 months, or 40% above current levels.
3. FL | Looking for a Blowout Print this Friday. FL ….We went long FL on 2/28 after nearly 20-years of being bearish secularly on the name. The reality is that the product and drop calendar is about as favorable this quarter and this year as we have seen in a long time. Nike, which is ~80% of FL’s product wall, is relying on more on FL while it steps back of marginal distribution line DSW and BGFV. For the quarter, we have FL comping at 75% vs a -53% last year. Add on 1,100 pts of Gm accretion and you get to $1.52 vs the Street at $1.07. That translates to an annual number of $5.81 vs the Street at $4.71. This is a classic retailer where the excess cash flow will result in excess stock repo – regardless of secular fundamentals. That builds to $8-$9 in EPS over a TAIL duration, which conservatively at 9-10x EPS = $81 plus another $8-$10 in equity value in FL’s interest in GOAT. All in that gets us to ~40% upside from current levels at FL.
SHORT SIDE
4. BJ losing share to COST -- We’re coming out a $0.60 vs the street at $0.57 for 1Q. BJs will get some stimulus help like most of retail, but we think share is shifting back to Costco. In peak pandemic 2020, Costco lost share as store capacity restrictions meant long lines and barriers to shopping the store for the regular customers. That drove a 300bps slowdown in comps for COST US in its quarter ending May. BJs on the other hand saw a massive acceleration with comps ramping to +27% in the quarter ending at the end of April. So we view Costco’s recent comp strength as both stimulus boost and regaining share that was shifted during the pandemic. We see comps continuing to weaken through mid-2021 for BJs as share shifts back towards competitors.
Original note. BJ | New Short Idea
5. KSS| Fade NT Strength… KSS -- We’re coming out ahead of consensus for 1Q at $0.20 vs the street at $0.08. That’s in the stock at $61. After the DDS print we have taken up both revenue and gross margin expectations in 1Q. Margins across retail looked to be buoyed by the blend of relatively low inventories, ramping demand from stimulus/reopening, and written down inventory selling at potentially above expected margin rates. As for sales, we still have KSS at a HSD % below 2019 given pressure on store traffic in 1Q from elevated Covid case rates, but stimulus is driving sales higher than we had previously anticipated. One area we are incrementally less bullish is credit, as in consumer credit in general we have seen high pay rates leading to lower balances and lower fees so we suspect KSS’s portfolio revenue saw pressure YY. We remain bearish on KSS as we continue to think its wallet share/spending opportunity is a weaker tailwind compared to other apparel focused retailers due to where it’s taking its category merchandising. Home is now about 25% of the mix, Active is 20%+, and other comfy basic apparel items are probably another 10%. All of these categories were in demand during the pandemic. So less than half the assortment will have the reopening consumption tailwind of people buying the apparel items they avoided for over a year. That means lower relative sales performance, and less relative merch margin opportunity vs many other B&M apparel retailers. Given rising cost pressures from shipping/inflation/wages lack of reopening share should mean weaker earnings performance for KSS. We’d fade any strength in unsustainable near-term numbers.
