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The Call @ Hedgeye | March 28, 2024

Takeaway: CPRI/DLTR/CAL/DBI/CTRN/JWN/HIBB/BBY/GME/DKS/AZO/URBN/OLLI/BURL/COST/ULTA/WOOF/ASO/PLBY/DUFRY/BGFV/MUDS

1. CPRI | It Doubled and it's Gonna Double Again. The earnings and catalyst calendars are setting up nicely for CPRI. High-margin/multiple Versace is starting to hum.


2. DLTR | Buy On Weakness.
Selloff deserved given mgmt’s poor expectation management, but catalyst calendar is lining up and Tail remains one of the best in retail.


3. Exceptional Quarter for Best Idea Long Caleres.
Put up $0.60 vs our estimate of $0.45 and the Street at $0.03. The company is basically blessing the 2Q Street number of $0.55, which is the easy way out from a guidance perspective. The company will come in above that. Keep in mind that by way of lease renegotiations and cost cuts we should alone see $2.25 per share in incremental EPS. Add that to the run-rate of $2.10-$2.20 in EPS pre-pandemic and we should see next year’s EPS better than $4 per share. Even if we give this a 10-12x multiple, we’re looking at a stock ~$45 in 12 months, which is 60% above prior levels (and 150% above when we first made the call at $18).


4. DBI Beat
. Best Idea Long DBI beat on both top and bottom line delivering revenue of $703mm vs estimates of $657mm and EPS of $0.12 vs estimates of $(0.15). Comps also beat consensus coming in at 52.2% vs estimates of 48.1%. The revenue acceleration was very strong going from -26.6% in Q4 to 45.6% in Q1. Gross Margin accelerated almost 4,000 bps to 30.7% due to strong merchandise margins as well as leverage on their fixed occupancy and cost lines due to the strong sales acceleration. SG&A dollars were up nearly 15 percentage points from last quarter due to the company’s decision to repurpose dollars gained from lower promotional activity into digital marketing leading to an operating margin of 2% which is a 5,000 bps acceleration from Q4 operating margin. While the company gave no guidance, management noted that looking forward the company anticipates continual increase in production year over year in their vertically integrated Camuto Group which is 1500 bps accretive to margins as management is seeing an increase in dress and seasonal footwear demand. Additionally, and importantly, CEO Roger Rawlins took a portion of the call to directly discuss Nike pulling out of DBI. Rawlins said “This brand accounted for less than 5% of our total sales in 2019 and grew to just over 7% in 2020 as a result of the mix shift as dress and seasonal dropped off significantly during the pandemic. On a positive note we have an active dialogue with all of our top 50 brands. And in the wake of this news, have spoken with the leaders of every single major athleisure brand we work with. These conversations have been very positive.” The reality is that this is a loss, but Rawlins sounded like he was speaking from a position of strength and displayed a sense of confidence that this loss is not a be all end all. While we prefer CAL over DBI, we still think that there’s $2.50-$3.00 in embedded EPS power in this model upon reopening, which suggests meaningful upside to the stock.


5. CTRN Great Print…
CTRN reported earnings this week.  It was a great quarter. Though from the pre-announcement we already knew it would be great. It was actually 10% better than the prelim result provided at $3.23.  CTRN is nearly generating the EPS of the last 2 years in a single quarter.  The stock sold off after the print due to the tempered guidance on the rest of the year, and the fact that the company is shifting capital allocation to new store growth rather than share buyback.  On guidance we think the company is just being conservative, particularly on the margin line as sales guidance at the mid-point is slightly ahead of our prior model, which was already well ahead of the street.  The company bought back 5.4% of the outstanding shares in just this single quarter.  We think the shift in capital allocation is a bullish move.  Unit growth investment will likely get better return than buying back stock near the peak. It’s a good time to ramp growth and take advantage of good real estate opportunities in urban areas. With that said, we know this board will be happy to reinstate buybacks if the stock pulls back materially, while still driving store growth.  Still an underfollowed and under-owned unit growth story that has some of the best growth trends in retail. Over a tail duration we see earnings power of $9 to $10. We’d put fair value on this at $115 to $140 with potential upside to $150+.  Still an underfollowed and under-owned unit growth story that has some of the best growth trends in retail.


6. Mixed print from JWN.
Nordstrom put up a mixed quarter, coming in at a loss of $0.64 vs the Street at ($0.57), but putting up solid sequential upside to 4Q levels. We’ve been long JWN since $21 (stock now at $36.50), and would be buyers on weakness around the headline miss, as the juice in the model really comes in the back half of this year and 1H next year when people restock the dressier end of wardrobes upon full reopening. Our next year number for JWN is in excess of $5 per share vs the Street at $2.30. We don’t want to get too greedy on this call as the Nordstrom family (who runs the business) will almost always take advantage of an opportunity to disappoint – but we think that a big upwards earnings revision is very real. Even if we give a 8x-10x multiple on a $5.30 EPS number we get to a stock roughly 30% ahead of where it’s trading pre-market.  


7. Big HIBB quarter.
  HIBB with a massive quarter, and another bold guide up.  Headline EPS of $5.00 vs the street at $2.56 on comps of 87.3%.  That’s comps 51% ahead of 2 years ago.  HIBB is taking a fair share of stimulus dollars.  Gross margin was a big driver here, coming in at 41.4%, nearly 700bps ahead of fiscal 2020 (April 2019).  The drivers per PR were  “higher sell through, a low promotional environment, a mix shift away from e-commerce sales which carry a lower margin due to incremental fulfillment costs, leverage of store occupancy expenses, and a decline in non-cash lower of cost or net realizable value (“inventory valuation”) reserve charges”.  The company’s inventories are down 25% YY at Q end so markdown levels likely remain low. The company after beating by $2.50 is guiding up $3.50, so QTD likely still remains above prior plan.  The company also increased its buyback authorization by $500mm, the company ended the Q with 271mm in cash.  The question to answer now for HIBB, is how much of the earnings seen over the last 12 months can the company now retain.  Management is highlighting winning and retaining new customers, which was likely the case since the start of the pandemic.  HIBB remained largely open and offered some athletic apparel and sports solutions that were in high demand.  We’ve been wrong so far to have HIBB on our short bias list, but we think the company has a real risk in being wedded to Nike with 65% of purchases and like 70-75% of sales with the company.  Nike will be happy to keep you around for the long term, but there is no way it will allow HIBB to sustain these margin levels of the long term.  For now we remain negative as we re-assess the amount of near term EPS upside vs long term downside.  


8. BBY with a big headline.
  37% comps translating to EPS of $2.23 vs $1.40 consensus.  The beat should have been expected, home connected names have continued to deliver in 1Q.  For now consumer wallet share remains with ‘nesting’ covid winners, we expect that will be changing as things continue to re-open which is happening rapidly.  The company is guiding up.  The quick math on the metrics suggests that the guide looks to be about $1.00 higher than the street after an 80 cent beat. So guiding the remainder of the year up about 20 cents, and that looks concentrated in 2Q so far with comps being guided up to +17% vs consensus at +6%.  SG&A is being revised up offsetting a good portion of the revenue upside. We don’t deny the near term comp strength for BBY, but as we see vaccines hitting critical mass, and public place/experiences reopening we expect consumers to start shifting back to more normalized spending trends and all of the electronics consumption over the last year or so will leave a big air pocket for BBY demand.  We’re at peak spending in the category, peak margins for BBY, and trough short interest. We remain short BBY.


9. GME NFTs.
  The headline that GME is getting into the NFT space may have surprised some, but not us. It makes a lot of sense to us, not that GME is going to make and sell digital art, but there is an entire economy around gaming that is very much hidden from the mainstream.  Given their general interest in computers and cutting edge digital/computing technology gamers are generally on the forefront of cryto/blockchain/nft technology.  You maybe be surprised to know that about half of the NFT market historically has been in gaming content and virtual land (otherwise known as Metaverses).  Maybe GME designs its own, or partners to make, digital rewards collectible NFTs.  Let consumers get them with their rewards points or via free drawings, but then have a royalty on them for when the trade in the secondary market.   The GME website (https://nft.gamestop.com/) looks to be hiring to potentially create its own blockchain ecosystem.  Why not?  GME could make the chain and marketplace catered to the gaming consumer, which is highly involved in the NFT digital content realm already.  It’s not unreasonable to think GME could build something rivaling or exceeding the market opportunity of Dapper Labs which recently got a $7.5bn valuation.


10. Huge DKS quarter.
  EPS over 3x the consensus with $3.79 vs $1.19. Revenue coming in 52% ahead of 2019 levels, that’s not a typo.  Stores were very strong as Ecommerce was up only 14% YY to 20% of sales.  SG&A was 25% ahead of 2019, and gross margins were nearly 800bps ahead of 2019.  It’s the best quarter ever for DKS gross margins by ~500bps, upside YY was about half occupancy and about a third merch margins, plus the lack of an inventory write down.  Management guided to ~$8.50 for 2021, that’s well ahead of the street at $5.46, but perhaps keep in mind LTM EPS is $11.45.  Revenue guidance implies the rest of the year down mid to high single digits.  “Q3 and Q4 performance expectations in line with our original guidance, which assumes comps will decline in the range of high single to low double digits” As of 1Q sporting goods is still ripping.  DKS noted it is “very pleased with the start of 2Q”.  DKS noted continued supply and demand mismatch driving high margins near term, Ed Stack was positive around merch margins being higher that pre pandemic over the long term.   On our sporting goods Black Book back in February we said we expected sporting goods retail to remain strong at least into mid-2021, and is likely to be a better business post covid vs before the pandemic.   Though so far in 2021 results across the board have been quite a bit better than even we expected.  There could be another quarter of upward earnings revisions. In Feb we said that DKS in specifically had a couple good quarters of runway still ahead of it keeping us from suggesting it be a short pair to ASO yet. So far that near term strength looks to be the case.  Also for DKS, we should keep in mind the convertible debt dilution.  Hedging pushed the conversion up to about 100% from the stock price at issuance, but that was $51.40.  The company had planned to settle the convert to avoid dilution, but perhaps the company wasn’t expecting to see a stock near $100 so quickly. In summary we like ASO as our horse in sporting goods given margin improvement and relative valuation upside as ASO has unit growth potential and preferable regional exposure.  Even after the DKS rally, ASO has outperformed since we went long. Top shorts are BGFV and HIBB.  We’re being patient and tactical on flipping net short the space and potentially raising DKS short side.


11. Great quarter out of AZO.
Company put up $26.48 per share vs the Street at $20.13. Almost entirely revenue beat. Put up a 29% comp vs the Street at 17%. GM missed slightly – and this stock never likes when Gross Margin misses. But the fact of the matter is that the DIFM/commercial business (lower gross margin rate, higher gross margin dollars) grew at an astonishing 44% this quarter. The amount of share AZO is mopping up from moms and pops in this critical part of the business is really impressive. Even more impressive is that the company bought back another $900m in stock this quarter. AAP is our horse in this space long-side as we like the margin upside as it closes the gap (even marginally) with AZO and ORLY, and that one reports next week. Bullish backdrop into that report.  


12. Strong URBN Quarter
. URBN posted top line and bottom line beats with revenue of $927mm vs estimates of $899mm and EPS of $.54 vs estimates of $.17. Additionally, comps this quarter were +51% vs estimates of +38% and +10% vs 2019 levels. The quarter’s highlights were a huge sequential increase in revenue growth going from -7% last quarter to 57.6% this quarter and Gross Margin going from -321bps yy change last quarter to +2,787 bps yy change this quarter for a rate of 32.6%. CEO Dick Hayne noted on the call “Perhaps the biggest company wide accomplishment in the first quarter was the strength of full-price selling and the corresponding decrease in markdown sales at each brand. The historically low markdown rate generated outstanding merchandise margins that when combined with tight expense control, led to record Q1 earnings per share” which is a line that has been often repeated for retailers this earnings season. Hayne also said that Q2 looks very strong with each brand posting double digit positive comps and the lower markdown environment remaining constant.


13. Strong 1Q for OLLI
, no doubt aided by stimulus as several of its quarters of outperformance have been.  Comps of 18.8% were well ahead of the street, though the market should have known a big beat was likely coming given OLLI’s comp cadence with stimulus. The company is not providing detailed guidance.  On QTD comps management simply noted that sales are ahead of its internal plan while lapping some of the strongest weeks of 2021.  It did say it’s ahead of a its long term algorithm on a 2 year basis.  That would simply mean a 2 year stack of at least 4%, vs a 2 year of 15% just reported. The company is not changing its gross margin guidance despite the incremental freight/shipping cost pressures.  That is in contrast to DLTR, though OLLI can flex pricing some where DLTR cannot. OLLI expects to offset some pressure with DCs cost leverage and merch margin (likely pricing). OLLI’s store opening cadence continues.  We’re negative on OLLI and the stock has significant under performed since we added short side last summer.  We’re about to hit the toughest compares for the model, and we think the stock will struggle to hold a high 20s multiple given the sales and deleverage risk over the next 12 months. Heading into the teeth of rate of change pressure, we’ll keep this one on the short side.


14. Burlington Blowout.
Top and bottom blowout with revenue of $2.19bn vs estimates of $1.78bn and EPS of $2.59 vs the Street at $0.83. Revenue grew 174% yy in the quarter -- +34% from Q1 2019. Margins were strong -- accelerating nearly 4000 bps from last quarter and up over 200 bps from 2019. The Gross Margin line was driven by better merchandise margins and a better promotional environment. On the call though, the company specifically called out that freight was a 110 bps headwind this quarter, a quantification other retailers have neglected to give opting instead only for a qualitative description of freight problems. In that same vein, the company noted sourcing costs were up almost 80% in dollars from 2019 due to higher supply chain costs. On SG&A, dollars were up both sequentially and over 2019, and the company drove SG&A leverage from fixed costs and marketing expenses driving an operating margin of 10.5% which is an 8000 bps acceleration from Q4 and a 360 bps increase from 2019. The company gave no guidance but said comp trends in Q2 are looking strong, they are expecting 20% sales growth from 2019 for the full year, and they are expecting continued severe expenses from freight and supply chain issues. The company also is starting to reduce its 2.1bn debt burden by executing a make-whole call on 300mm of outstanding high yield unsecured notes citing growing comfort in the macro environment to start to use cash for leverage reduction. While we’re not averse to owning BURL by any means, TJX is our horse in this race.


15. Solid COST quarter.
Costco beat both top and bottom line with EPS of $2.75 vs estimates of $2.32 – an unusually wide beat for COST. Worldwide ticket and traffic growth both sequentially increased to 7.3% and 12.5%, respectively. However, unlike other retailers, gross margin fell by 30 bps sequentially to 11.18% due to a mix shift toward lower margin ancillary category vs last year. SG&A dollar growth decelerated from 16% growth to 9% growth this quarter due to lower COVID costs vs ly. Those reductions in COVID costs led to a 3.7% operating margin which was ahead of estimates and a sequential acceleration of 70 bps. On the call management did speak specifically about the inflation they are seeing noting “I was asked back on our March 4—second quarter call at what level inflation was running overall at that time with our goods. I stated that our best guess was somewhere in the 1%-1.5% range. As of today we guess that overall price inflation at the selling level excluding our gasoline sales, would be estimated to be probably more in the 2.5%-3.5% range.” Management believes that the company is in a strong position to combat inflation and has pricing power in order to mitigate price increases.


16. ULTA pulled out all the stops
in Mary Dillon’s last quarter as CEO. Printed $4.10 vs the Street at $1.99 – that’s 27% higher than 1Q19. Comps of 66% vs expectations of 40%. A blowout any way you look at it. Guidance seems to imply a back half slowdown, but this is a category that should benefit upon reopening – more ‘going out’, more special occasions/events, more going to work, and no more wearing masks over 50% of your face. We’re short ULTA and are definitely wrong on this print. If the consensus numbers follow company guidance, we could be setting up for a series of beats in the back half, which could make us re-evaluate our stance on this name over a TREND duration. We still don’t like the TAIL call, as the company is running out of square footage growth, and the Target deal seems to us to be a last-ditch land-grab by an outgoing rock-star CEO to grow the business the easy way, but not necessarily the right way.


17a. Petco Secondary Offering
. Petco announced that the company’s principal stockholder, Scooby Aggregator LP, will offer 22,000,000 shares of the company’s Class A stock for sale in a secondary transaction. Scooby Aggregator is the vehicle used by CVC Capital Partners and CPP, the firms that brought Petco public. All the proceeds from the sold shares will go to Scooby. Scooby Aggregator currently owns 75.6% of Petco Class A stock (171,224,140 shares). Following the transaction Scooby will own 65.9% of the Class A shares (149,224,140 shares) and there will be 226, 479,442 Class A shares outstanding. The stock hasn’t been trading like a deal was coming – which is probably why it’s happening. We’re still well ahead of the consensus estimates over a TREND and TAIL duration by a wide margin, and like the fundamental story here a lot. We’re buyers on weakness around the offering – though the stock is down less than 2% pre market.
17b. Botched WOOF Deal. We have BofA to thank for botching the book for the WOOF deal, which caused the stock to trade down to $22.80 this week. We’re buyers of that stock all day at that price.


18. Academy Refi.
Academy Sports and Outdoors announced that it completed a paydown and refinancing of its term loan along with receiving a credit rating upgrade from S&P. It reduced its term loan obligation by $99mm leaving an outstanding principal balance of $300mm and lowered their interest rate on the remaining balance by 125 bps to LIBOR plus 3.75%. This new rate is anticipated to save the company $9mm in annual interest expenses. Its credit rating was increased from B to B+ based on improved credit metrics and financial policy, strong business trends, and the reduction of the largest stockholder’s ownership to under 40%. This company has made incredible efforts to work with its debt burden and we still believe this company has room to run to the upside.


19a. PLBY debt refi.
PLBY Group announced that they have completed the refinancing of its $160mm senior secured term loan maturing in May 2027. The refinanced loan has a LIBOR floor of 0.5% and accrues interest at LIBOR plus 5.75% with a single stepdown to LIBOR plus 5.25% upon the company achieving gross leverage of 3.0x. Management had signaled this was coming saying during their Q4 earnings call “…we intend to kick off a process to refinance our existing debt shortly after earnings” and now the refi results in an estimated $3mm reduction in annual interest expense, $3mm reduction in annual amortization expense and eliminates of $7mm in annual excess cash flow sweep payments along with the allowance of a borrowing request of up to $30mm additional incremental term loans. We like this move on two fronts: general cost savings as well as more flexibility to execute their stated M&A strategy. The bear case here is that this is the final move before PE steps in and sells stock – by a country mile the biggest pushback we get from institutions who refuse to buy the stock ahead of a potential PE sale. PLBY remains one of the best multi-year calls we can find in retail. We’re big buyers on weakness around additional shares hitting the market.
19b. PLBY Shoe Collab. The world of Playboy collabs is getting even larger as the company announced a partnership with British footwear company Duke & Dexter. The marriage of these two brands seeks to highlight the magazine’s cultural influence and emphasize the Playboy vision of self-expression. The Duke & Dexter CEO said about the collab “We’re really excited to show who the modern Duke & Dexter x Playboy is – subversive, tasteful and ultimately, aware”.  The collection contains 8 loafer designs all priced between $289-$346. As we have noted before a big pillar of the Playboy story is highlighting the founding principles of the magazine and lifestyle, and this collab furthers that initiative by the company. Best Idea Long.


20. Dufry New Concession.
Dufry announced it has won a new five-year contract to open a duty-free shop at Cayenne-Felix Eboue International Airport in French Guiana. The airport served 550,000 passengers in 2019, and Dufry’s 120 square meter shop will open on August 1. The opening of this concession further extends Dufry’s leading footprint in Central America, South America and the Caribbean which is one of the hottest tourist destinations in the world. Dufry’s partnership with Advent as well as its own financing initatives have given the company ample liquidity to weather the COVID storm for as long as necessary, but for small and medium sized players they are not so lucky. Dufry has the ability to be a white night for these struggling shops as well as give airports a power player who is able to pay rents and fees while furthering its global dominance to get ready for the reopening wave.  DUFRY is one of our favorite Long Ideas at current levels.


21. BGFV CFO sold 3.3k shares
in the open market – I’d be selling if I were him too. This company earned no better than $0.70 per share in the five years pre-pandemic, but is riding the wave of strength in the sporting goods space today and is clocking in close to $3.50 this year. It’s staring down the barrel of ridiculously tough comps, and will have to do so WITHOUT Nike, which accounts for 20% of BGFV’s softgoods sales and cut off the retailer in order to drop distribution that is not ‘brand worthy’. This story does not end well for Big 5. We’re short the name.


22. MUDS/Topps/Sports Memorabilia Callout.
Wayne Gretzky Rookie Card sells for $3.75 million. No, that number is not a joke, and perhaps the even crazier part of that number has been the price trajectory of this card. In 2011 this card was sold for $94,000, then in 2016 it was sold again for $465,000, then this past December it was sold for $1.29 million. The main insight here for our long call on MUDS/TOPPS – aside from the fact that the memorabilia market remains white hot – is how NFTs can create a recurring revenue stream for digital sports moments compared to the old standard of secondary market sales for cards. With in-person auctions the card maker gets no money other than the initial sale of the card (which in this case was back in 1979) but with NFTs each time a card or a digital picture or clip is sold TOPPS could receive a cut of each transaction opening a pathway to possibly huge incremental revenue. We remain long TOPPS.