1. AMZN | Great Quarter and the Market Expected It While the TAIL call is bullet proof, the TREND call is less certain.
2. GIL | Solid Rate of Change. Best Idea Long. We’re 20% ahead of the street for 2021, 40% ahead in 2022, and think you have $3.00+ in earnings power over a TAIL duration when all categories recover from the Covid hit. That’s good for a $45 stock, or a 2-bagger from here.
3. RL | This Is Why We're Short. All the reasons why we have RL as a Best Idea Short are playing out in this quarter. The company put up a huge headline beat, but put up simply atrocious revenue trends and made up for it in SG&A cuts. This brand is losing relevance by the day, but the good news is that it can absolutely be fixed. Almost any brand can with the right amount of capital. The bad news is that in this case it’s likely going to remain broken. To regain momentum the company needs to take its SG&A cuts, and reinvest elsewhere in the organization at an outsized rate in order to increase consumer connectivity and make the brand both desirable and competitive again. But it’s taking the easy route to grow earnings – cutting costs and flowing it through to the EBIT line without the reinvestment the brand so desperately needs. SG&A in aggregate was down 21% -- that’s $167mm, or 140bp in margin upside – and margins were STILL down 225bps due to the sorry state of the top line. Some numbers to prove the point…North America wholesale was down 46% and comp sales at its own stores down a depressing 31%. It touted improved e-comm growth – but that was up only 10% in the US. A bit more impressive in Europe with digital up 26%, but a massive deceleration from the 44% rate we saw in 1Q. This morning the Coach brand put up triple digit e-comm growth. And people think the Coach brand is dead? Not quite. If there was only one statistic I could look at for a company in a given quarter, it would be the level of ecomm sales. That’s especially true in a covid world where there has been a permanent shift to e-comm as it relates to consumer shopping behavior – and we’re facing the biggest digital shift we’re likely to see in our lifetime. Brands with heat are comping up between 80% and 120% online. Heck, I gave Puma a hard time yesterday for only growing e-comm at 60%. And RL puts up a +10% in its core market?!? That’s simply inexcusable. Ralph is trying to upscale its business and notes a 26% increase in Average Unit Retail – but that’s an irrelevant metric when you can’t hold onto a stable number of units to actually drive the top line higher. A -30% top line when all stores have reopened simply won’t cut it. The problem here is management. It simply has the wrong philosophy for capital allocation and thinks that it can make the brand relevant again simply by working harder and smarter. Sorry folks…in 25 years I’ve never seen ‘hard work’ fix a fashion brand. It takes capital, and a lot of it. To RL’s credit, the stock looks cheap – especially with it selling off on a headline beat. But at this rate, we’re unlikely to see $5 in EPS over a TAIL duration, and the Street is looking at $6.00 next year. Not gonna happen. This name is cheap, and is likely to get cheaper – until its expensive at a lower price once earnings flush out.
4. TPR | Improving On The Margin. Solid quarter from TPR relative to expectations, driven in particular by the Coach brand, which beat top line forecasts by over 15%. EPS for the quarter came in at $0.58 vs the consensus of $0.22 (and $0.40 a year ago)– driven by virtually every line of the P&L. Impressive that earnings are already back above pre-pandemic levels. Still plenty of wood to chop at Kate Spade and Stuart Weitzman, but progress is evident on the top and bottom lines. One of the most impressive stats in the quarter is that Coach handbag Average Unit Retail was up 25% globally, and over 20% in the core North American market. That translated to triple digit growth in digital sales. By comparison, RL put up similar growth in AUR, but only translated that to 10% growth in digital. If there’s one number that is a proxy for the health of a brand, it is its digital growth – especially given that we’re seeing the biggest permanent sea change in shopping behavior towards online that we’re likely to see in our entire lifetime. About half of the beat was driven by SG&A leverage, which I won’t necessarily give credit for past one or two quarters – as I’d rather see the $235mm cost saves vs last year remain in the model to continue to drive the top line – particularly at Kate Spade. But to TPR’s credit, its recent marketing strategies have been working as evident in the positive rate of change in the brands. Credit to the company for taking a stab at guidance, calling for FY21 to increase at a mid-single digit rate vs ly (vs the Street at 3%). That includes a low double digit sales decline in 2Q (ending Dec), which sounds beatable with a significant topline inflection thereafter (in fairness all of retail will see a massive inflection in 1H of CY21). Current Street estimates for the Dec quarter are for $0.87, which looks conservative to us by 10-20%. This name sits on our Long Bias list as we think the category has bottomed, now improving on the margin, and expectations are largely too low. We have Capri as our lead horse (Best Idea Long) in this space as there are more dramatic and sizable TAIL earnings drivers that should make the stock a 3-4 bagger over the course of 2-3 year time period. But by no means are we against owning TPR. The name has better than $2.50 in earnings power over 2-years, and is trading at just 9x that number today. More realistically, we’re looking at a 12-13x multiple on $2.50 in EPS on an NTM basis over the course of 12 months, which gets to near 50% upside from current levels.
5. Strong Golf Rounds Played #s. The NGF reported growth in rounds of golf for September this week. Growth accelerated to +25.5% the highest growth rate seen this year. This absolute rounds impact is somewhat less than other months given the lower rounds played, but it’s still a rather impressive result. YTD rounds are now up 9%, and the year is likely to finish up that much or a bit more which would be the highest growth rate seen in a long time for golf rounds. The important question is how will this translate to sales of equipment and apparel for the industry. The street is expecting GOLF sales to be down in 3Q, and for golf ball sales to be up just 12% or roughly half the rate of rounds. Those number seem too low given the rounds trend, so perhaps there is upside this Q to revs. Though at the same time the market seems to be pricing in earnings beats with the stock well above typical multiples at 24x EPS and 13.5x EBITDA. So GOLF needs to beat or it will see a big selloff. Street expectations out in 2021 are baking in a sales recovery to a level greater than the economic peak in 2018/19, which we think is going to be hard to beat even with greater levels of play.
6. Better than decent quarter from Puma, which put up a solid sequential increase in the rate of sales growth with respectable flow through. Constant currency sales and earnings both grew by 13%, and weaker Gross Margins were offset by SG&A cuts that were initiated in the second quarter when the business model and operating environment were operating at maximum stress. The company noted that October started well, but said it’s cautious on the balance of the year due to the trajectory of Covid infections we’re seeing globally. I was both surprised and disappointed to see the 270bp decline in Gross Margin, particularly given that high-margin e-commerce was up 60% during the quarter. The Americas (+21%) led the sales strength in the quarter, followed by EMEA (+18%), while Asia/Pac declined by 1.9%. As a point of comparison, in Nike’s August quarter (1Q21) it’s constant-fx sales were flat with -1% North America sales – so Puma is clearly gaining share on a relative basis. Impressive working capital development, as the company’s trade payables were up 30% as it flexed its leverage with suppliers. That’s the exact inverse of what we saw out of Nike, which saw a 27% decline in payables in the quarter. Puma’s inventory was in check – up 7% in the quarter, and receivables were down 4%. Puma’s statement around the current environment “Even though the business in the third quarter developed better than we had expected, the uncertainty for the fourth quarter remains very high. Globally, the number of COVID-19 infections is at the highest level since the outbreak of the pandemic, many regions are re-implementing restrictions and the consumer sentiment is again turning negative. As the development for the coming weeks continues to be unpredictable, we cannot provide a reliable financial outlook for the full year 2020.”
7. Ugly 2Q21 print out of MNRO – Best Idea Short for HedgeyeRetail. The comp trend came in down 11.4%, which was nearly spot-on with trends we’re seeing in miles-driven, EZ Pass traffic, and gasoline consumption. Gross Margin was down 150bps, and EBIT margin down 180bps for a whopping 37% decline in EPS. The company snuck in an acquisition of 17 stores in the quarter. Hey, why the heck not??? When profits per store are down so much – just add more operating assets. I get that M&A is core to the MNRO story (one of the reasons I think it’s broken strategically), and perhaps a bull will argue that it is buying competing assets at a time when they are feeling the most pain (i.e. on the cheap). We’ll have to factor that into our model – but it’s dilutive to this year, so can’t be that cheap. But if I want to get serious about buying this business, I want to see it successfully accelerate the transformation (ie double the current run rate) of its current store base – which is facing significant comp headwinds. If there’s one category golf clap I’ll give MNRO its in the tire category – which comped down only 3% in the quarter as the company rolled out new tire pricing and category management technology which is progressing as planned and on track to be completed by end of Q3FY21. Wish I could say the same about Alignments (-16%), Maintenance (-19%), Front End/Shocks (-19%) and Brakes (-24%). The lack of consistency in this model is disturbing. It needs a CEO (Korn Ferry searching right now) that can take its portfolio of stores, invest capital (meaningfully take up capex) to upgrade the fleet instead of wasting away capital on dying competitors. At least with the former CEO, there was a call option on him orchestrating a sale of the business to private equity, which seems to have an affinity for this business. But he’s out, and getting the business sold isn’t likely the top priority for the new leader. I want to be careful about overstaying my welcome on this short, but the business momentum is among the worst in retail today, with traffic metrics going the wrong way. It’s distanced itself massively from the positive trends we’ve seen at ORLY, AAP, and AZO. I’ll be patient on this one.
8. ORLY Crushes it – Again. In stark contrast to MNRO, ORLY came out and crushed yet another quarter, proving yet again that’s the best in the auto aftermarket retail business. EPS clocked in at $7.07 vs consensus of $6.44. Comps came in at an impressive 16.9% vs the Street at 11.2% -- nearly spot-on with the ‘elevated’ number it put up last quarter. The company leveraged 20.2% sales growth to a 249bp improvement in EBIT margin (to 22.6%), and a killer 39.2% improvement in EPS. If there’s any knock here it’s that Gross Margins were down 90bp and the company made up for it with just 8% growth in SG&A. Unlike MNRO, ORLY (and for the most part AAP and AZO) continues to take the fact that miles driven and gasoline consumption are down 10-15% and pretty much ignore that the macro trends are going against it. While the DIY business was the larger contributor to the SSS increase, management noted that the Pro business (DIFM) performed above expectations in the quarter [making MNRO – which is 100% DIFM] look even worse). ORLY started off Oct strong with comps in the low double digits – all the more impressive given that stimulus is largely a non-event today and it fueled the business earlier this year. Inventories were up only 5% at the end of the quarter, which bodes well for gross margin in the December quarter. Repurchased an impressive 1mm shares of stock in the quarter at $458.70 average price (stock now at $442), and subsequently upped the authorization by another $1bn. We took ORLY off our Best Ideas Long list way too early given our concern about miles-driven (though that’s when we correctly got loud on our MNRO short), but the company has completely bucked the weaker milage trends. The only caution I’d throw out is if no new round of stimulus is announced, it’s going to be going against a very tough round of compares come 2021 – though at just 0.9%, the consensus is already there. Tough to paint a bearish thesis around ORLY here.
9. BBBY, Half Positive, Half Frightening. I was half impressed, and half scared to death (for BBBY bulls) in listening to BBBY’s investor day. On one hand, the brand new management team seemed very cohesive, seems to have a firm grasp of the company’s problems, and put forward a cohesive plan to get the model going in the right direction. The bad news is that so much of the plan – especially the push away from couponing and a move to more of a compelling everyday low price (EDLP) – reminded me of when Ron Johnson ultimately bankrupted JC Penney. JCP’s big gaffe is that it fired its customer and couldn’t ever recover. BBBY won’t do that. But it said several times in the presentation that it needs to be sharper on price and promotions in order to compete better against Mass Retailers. Quick note here…Bed Bath & Beyond has perhaps the most daunting competitive set of anyone in retail. It sells largely commodity product (and is admittedly trying to change that with private label – though that fails more often than not) and competes with Wayfair and Amazon on one hand – both of which are price agnostic. Then it competes with WalMart and Target – that increasingly will simply not be beat on price. And then department stores’ home department, where it actually stands a fighting chance. There was one part of its store fleet plan that puzzled me…It has over 1,000 stores, and will be closing 200 stores stat. Then it plans to invest $250mm on 450 stores over the next three years, which it claims will represent over 60% of revenue. Why pick those 450 stores? More importantly, what does it mean for the 350 stores that are staying open but won’t be touched. Are they future store closure candidates? In a backwards kind of way, BBBY might have just told us that it’s going to cut the size of the fleet by 50% over 5-years. On guidance, the company said that the FY21 (ending Feb22) calls for a ‘stable’ outlook. Stable? C’mon…Home is the hottest category in retail. I understand that it takes time to remodel stores, launch new brands, and rationalize SKUs, but the likelihood of the category still being this hot in ‘22/’23 is rather slim and will face huge comp hurdles. That’s when competitors will get more desperate and put more pressure on BBBY. The most bullish part of the guide is that there will be $850mm to $1bn in EBITDA in Feb 24. That hinges upon low-mid single digit growth on a declining store base and a gross margin up 300bp to 38%. The competitive set will only be stronger and more efficient with same day delivery by then – not sure they’ll let BBBY hit those margin targets.
10. CHWY Telehealth Launch. Best Idea Long Chewy (CHWY) noted plans to launch telehealth services nationwide to pet owners. At first glance, I thought it was a way for people to access a vet network as a means to prescribe ped meds, like Heartguard, and Frontline (flea and tick) medications that otherwise have a steep markup at vet’s offices. But this is a toned down version of that, as Chewy said its service will connect pet owners with licensed veterinarians who can answer questions, give advice, discuss concerns, and refer pets to local vets and emergency clinics. The service is not for diagnosing conditions, providing treatment, or prescribing medications. My sense is that the latter, presecribing meds, will change, as this is a major future profit center for CHWY. The service is available for clients that use the Autoship feature – which is about 70% of CHWY customers. I still think that this is a $80-$90 stock over the next 12 months.
11. Outstanding CROX Quarter, Still More Upside. Crocs isn’t a name I usually comment on, but I gotta hand it to ‘em, this quarter was outstanding. The company put up $0.94 per share vs the Street at $0.70 in what was very much a top line driven beat. The brand has an unusually strong amount of heat right now, and the quarterly results don’t even include the recently launched collaboration with Justin Bieber – which sold out shortly after they dropped earlier this month. Revenue was balanced around the globe, but was particularly strong in the US market. Channels results were equally balanced, which is rare for any retailer these days as brands are relying so heavily on ecommerce. While e-comm was up 36% (accounting for 38% of total revs including 3rd party sales), wholesale was up 12.4%, and retail was up 8.9%. At this rate, CROX is likely to earn next year’s $2.67 estimate a year early, and push better than $3.00 per share in 2021. Valuation is rich, but that’s on the consensus numbers, and in this instance, the Street’s got it wrong. This stock is headed higher.
12. ELY Buying Full TopGolf Stake. It looks like Callaway is acquiring the 84% of TopGolf that it doesn’t already own. Kind of surprising given that last year the story revolved around it divesting its share of TopGolf, given that it’s non-core to ELY business and the environment was ripe for a multi-Billion dollar IPO. The deal is being valued at about $2bn, roughly the same as it last round of funding in 2017. Looks like its value took about a billion dollar hit due to covid, and ELY wants to sit on the whole thing until it can presumably IPO the business post-pandemic. We’re generally bearish on the golf industry, as we think that the golf economy is not keeping track with the increase in rounds played that we saw spike over the summer. ELY has been no stranger to acquiring outside of its core. Last year it paid $500mm for apparel and equipment maker Jack Wolfskin, adding to TravisMatthew and Ogio. Assuming that ELY actually holds on to the TopGolf asset instead of spinning it off when conditions improve, the revenue mix will be 30% Golf Equipment, 46% Topgolf and 24% Softgoods. I’ll be surprised if we don’t see a spin in a post Covid world.
13. Mixed SITC Numbers. SITE Centers (SITC) put up 3rd quarter FFO of $0.23 per share – in line with the consensus but well below $0.30 per share last year. SITC is one of the largest operators of open air shopping centers (ie the Strip Malls where you can find the likes of DKS, BBY and BBBY). The company reported a decrease of 17.8% in same store operating income for the quarter. It generated new leasing spreads of 12.9% and renewal spreads of 5.5%. Reported a leased rate of 91.9% at September 30, 2020 on a pro rata basis, and 94.2% at September 30, 2019. The sequential decline was primarily related to the bankruptcy of Ascena and Pier 1 with the Company’s anchored leased rate increasing 40 basis points sequentially due to new leasing activity. A bullish statistic (for landlords, not retailers) is that annualized base rent per occupied square foot on a pro rata basis was $18.53 at September 30, 2020, compared to $18.04 at September 30, 2019.
14. LVMH and TIF are Back On. It looks like TIF touting the improved trajectory of its business last week helped get LVMH back to the negotiating table, as both parties are reportedly looking to get the deal done, albeit at a lower price than the $135 per share agreed upon 11 months ago. The $131.50 price agreed upon seems to me like far too small a haircut to the original price given the economic value that has been destroyed over the past year. TIF needs this deal far more than LVMH does. If it falls through, the name loses its acquisition premium, trades on (abysmal) fundamentals, and will be lucky to be a $75 stock.
15. Initial CPRI Feedback. We made a big CPRI call last week (3-4 bagger over a TAIL duration). Click Here For Note. I spent a good part of last week on the phone with investors. Lots of feedback, though there was one common thread, and that is how I can get comfortable with the 27% of Michael Kors revenue that is tied to the department store channel. I like that feedback for two reasons. First, is the easy answer, and that is that CPRI is using Covid as an opportunity to ‘rip the band aid’ off marginal and unprofitable wholesale distribution and focus on its in-line stores and premium wholesale doors. Not big revenue growth in that part of the portfolio, but 1,000bp margin opportunity as the brand corrects the product assortment and most importantly sells it where the high end consumer shops. The bigger reason why I like this point of pushback is that it’s completely missing the point that margins at Jimmy Choo and Versace have ~1,500bp of margin expansion in addition to accelerated top line growth – each of which are good for $20-$25 in incremental stock price – which is huge for a company whose stock is trading at $21.22 today. That, on top of the delivering of the balance sheet and shift toward higher-multiple cash flow streams is the crux of what gets you paid here. The fact that people are so focused on Kors, gives me added confidence that we’ve got something here. Will follow up with more feedback after our Black Book presentation on Wed.
16. Will be tough to find a strategic buyer for Reebok. With Adidas making waves about divesting Reebok, the race is on to find a logical buyer. I don’t think this going to be an easy sell – at least not to a strategic buyer. First off, the brand is dead. Not even like ‘kinda dead’, but seriously dead. Even UnderArmour has brand heat compared to Reebok, and UA is on life support. Second of all, the culture of the company is a bizarre cross between a home-town Boston legacy brand and a German-engineered acquisition that should never have been. Separation there won’t be easy. Reverse engineering integration of back office is palpable, but can’t really undo culture without major leadership changes. VFC has $3bn in cash to do deals…it can afford Reebok. But VFC is not good at fixing things. Just look at Timberland – that was a local deal and hardly a home run. VFC is great at paying high-ish multiples for brands that need absolutely no work. It will have to completely re-establish a strategic plan and put up the capital to execute to generate an acceptable return – and I question if that’s worth the time or the effort for VFC. Adidas will likely need to find a financial buyer…though a p/e firm will look to buy it on the cheap and then run it for cash – which is easier said than done at a near break-even margin.
17. ASO Fixing its Balance Sheet. Academy Sports and Outdoors – announced its second debt issuance in 2 weeks ($400mm this time – in senior notes due 2027). ASO intends to use the proceeds from the notes to repay a portion of the $1.4bn outstanding under its term loan and pay related fees and expenses. The stock is squarely above the offering price, after a rough start going public three weeks ago. Don’t underestimate the impact of a balance sheet repair in a space where the category is white hot and the stock is trading at such a significant discount to its top competitor – Dick’s Sporting Goods. ASO trading at 11x eps and 6x EBITDA vs DKS at 20x earnings and 9x EBITDA. Won’t catch me buying DKS here – even though the company is company is comping ahead of plan –something the entire Street seems to know. Not to mention that management is selling stock. ASO, however, is looking more interesting on the margin. I think delivering stories will be a bigger theme in retail over the next year – which invariably provide more juice to the multiple than people otherwise think up front.
18. Guitar Center Prepping to File. Guitar Center missed an interest payment of $45mm this month, setting off a 30-day grace period that could well end up in default. That would make it the next major retailer on the Ch11 docket. It’s still possible that Guitar Center could avert bankruptcy, as it did earlier this year when it resolved a skipped interest payment in April with a distressed debt exchange. That led to a downgrade by the credit ratings agency Moody’s in May, which noted that the transaction did not “fundamentally change” the company’s “untenable” capital structure. It was the third cut in the company’s credit rating this year. The concept has been in business since 1959 and has nearly 300 stores in the US. It’s owned by Ares Management (p/e firm) witch acquired a majority stake in 2014 after swapping debt into equity. Guitar Center has generates about $2.3 billion in sales and has $1.3bn in debt. Over the past 10 years, the retailer has been disintermediated by the likes of Sweetwater (catalogue), as well as musical instrument marketplace Reverb – which was bought by Etsy last year for $275mm, and is now dominating both new and used instrument/equipment sales with 100% price transparency. Impossible to compete with that as a B&M retailer.
