Brian McGough from Hedgeye on the (dismal) State of Retail (podcast #170)
Brian McGough, head of retail at Hedgeye, joins the podcast to discuss the state of the retail sector, hit a wide variety of names, and explain why he's so bearish on the sector currently.
This podcast is sponsored by Hedgeye.
Hedgeye is an investment research firm that delivers high-conviction investment ideas through fundamental, quantitative, and Macro analysis. Our guest today is Hedgeye Retail Analyst Brian McGough. A few weeks ago we had Industrials analyst Jay Van Sciver on the show. I think the depth and quality of their analysis always shines through in these conversations.
If you’d like access to Hedgeye’s favorite long and short stock ideas, check out The Call @ Hedgeye, their daily stock investing webcast featuring Brian, Jay, and the entire stock analyst team.
Please follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or share it with someone else who would enjoy it (more listeners is a critical part of the flywheel that keeps this Substack and podcast going!).
Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript
Transcript begins below
Andrew Walker: Alright. Hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it'll mean a lot if you could rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have Brian McGough. Brian is the co-founder of Hedgeye, heard of him from the past podcast, and the head of retail over there. Brian, how's it going?
Brian McGough: It's going great, it's going great. Retail stocks are going down and I'm short them, I'm happy.
Andrew: Well, let's talk about that in a second, but let me just get a quick disclaimer out of the way before we go there. Nothing on this podcast investing advice, that is always true. But particularly true today because Brian just mentioned shorting which, you know, shorting carries extra risk, so everyone should certainly be aware of that. We're going to talk through a lot of different names and the retail sector in general. So people, just remember, no investing advice, please consult a financial advisor. All that's up.
So, Brian, I want to dive into your bearishness to start and then we can talk specific names. We're sitting here, recording. It is June 2nd. It is been a, you know, we're probably almost done with all the retail names kind of start reporting in mid-may running through now. We're almost done with them. It's been a disaster in general. I listen to prep for this podcast. I went and listened to an interview you did in January, and you said, "Look, I am super bearish. I could see myself getting bullish in the April/May timeframe after a lot of companies have kind of cut their numbers and earnings estimates have come down across the board. We're June, you kind of beat me to the punch when you open and you said I'm still bearish and short retail, but I just want to turn it over to you. In general retail, what are you seeing?
Brian: So, I'm seeing nothing but red, actually green here, it's up here today. But let's just talk about the trends and about what's going on with the underlying businesses, and most importantly, what the management teams are seeing versus what they're saying, and what the consensus is believing. Because I think they're all very different things and we have to take those into context. So, the consumer is getting weaker, there is no doubt about it. We've seen retail sales decelerate every month sequentially over the course of this year. Right now, the main one I look at is it's called the Red Book Sales Index. It comes out every Tuesday at 8:55 a.m. It's sitting up at about 1.5% right now. I would think that'll go negative by the end of June or July. You have student loans that are coming back over the course of a couple of months, that's bad. Credits tightening. The personal savings rate, which is a fear index, I'll call it. It's when people are afraid of their jobs, that's headed higher, that's crimping personal spending. So, overall, I can't point to a single... actually, I can only point to one company that's pointed out an acceleration in their business, and I think they're lying. That's Nordstrom. I'll talk about them later.
Everyone is just seeing decelerating trends across the board. And I had said, yes, I said six months ago and probably three months ago, and probably three weeks ago, that I was looking to get more bullish around the April/May timeframe, particularly May as earning season came in. But the unfortunate thing is that management just didn't take down earnings expectations enough. Just to give you a couple of numbers, retail generates operating profit every year of about 150 billion. So, for seven years straight pre-pandemic, 150 billion every year plus or minus 2 or 3%. Then came the pandemic, it dropped down to about 90 billion. And then, we had this big surge back in 2022.
The consensus in 2023 is looking for 230 billion dollars in EBIT. When a normalized growth rate, never mind a recessionary growth rate or rate, is 150 billion. And they're looking for the same thing in 2024. So, what I was expecting after management teams getting kicked in the teeth a couple of quarters, having a guide down, and nickel here, a dime there, or here, that they would really just take that guide that's in a really, really big way, and they didn't. I can point to just a few companies, like two or three, maybe four of them, that actually really took very conservative guides out. I was expecting closer to 20. So, I was wrong in that regard. And I think, management, they're just assuming that things are going to stay how they are.
And you know how this game works, management says, "We think we're going to earn three bucks this year and the sell side goes out there." They plug that in their models, and they say, okay, they're going to do three bucks this year. Bingo! And they don't count on what the cardinal rule in retail is, is that the first guide down is never the last.
Andrew: I love that. I guess, I love that you're projecting because I certainly, you know, the past year has just been a disaster for anything resale, and I dipped my toe into a couple of them and some of them worked out, okay, but most of them just got your face ripped off. I guess the first take would be like, I don't think there's anybody who, you know, I don't talk to anyone who's really bullish macro, or who doesn't think we're going into a recession, and you can debate the types of recession we're going through. But I think the first thing would say like, hey, people are getting-- especially after the past couple weeks, people have gotten their head over with how bad the near-term trends are going to be here, but if you're willing to take like a little bit of a longer-term view, aren't these stock prices getting pretty darn attractive? Like, it's tough for me, I don't know, one that I looked at because we were going to record about two weeks ago, and Footlocker just reported. Footlocker, right? They've taken numbers down quite a bit. I think they started the year, guiding for 350. Now, they're guiding to about 230 or something. The stocks of 25. So, you're talking like 11 times earnings, and if I said, hey, this year is going to be a trial. Maybe it is, maybe it isn't. And I'm not saying Footlocker's my favourite business model of all time. But you know, if you think that 350 would be in play two years from now in a better environment, then wow, you're really starting to talk about a kind of cheap stock. So, I guess the counter is, haven't these stocks drifted down enough where if you're taking a longer-term time horizon, they look pretty darn cheap?
Brian: That's a great question, Andrew. There's a couple of them that are, I will not call Footlocker, one of them. I think it's a structure they broke in business. It probably should trade at about six times earnings, so it's probably fairly valued about now. I'm not sure Footlocker, I'm sure what about 75 stocks. That's not one of them. I was, and then it blew up. But there are certain businesses like CPRI, is a good name whereby this is trading at a free cash flow yield, so the free cash flow to Enterprise value, of 18%, which is the highest it has ever been in the history of the company barring March of 2020.
So, the question then lies, are the numbers people looking, are they right or are they wrong? So now, this is when guys like me actually get paid to do our jobs, which is, we got to get in the models, we got to get in the research and we got to get really deep and figure out if consensus is right or if consensus is wrong.
For a company like CPRI and other names like it that we could talk about, there are some that are getting so cheap that if I've got two brain cells and I'm in private equity, I would just buy this business outright, I would sell the pieces to LVMH and hearing in Richemont and tapestry, and you admit money on this transaction and get an IRR beyond their wildest dreams. So, that is one of the reasons why I happen to like that stock right now, aside from the fact that I do think they'll be a meaningful earnings rebound next year, and it just got it down twice in reaffirm the year, I would argue the company should probably have just taken down the year to get the hockey stick out of the way. I don't know if you're a hockey fan, Andrew, but Wall Street does not like hockey sticks. Anytime there's a hockey stick guide, like yeah, things are bad now, but they'll get better in a couple of quarters. No one will ever believe that, and a company or a stock will never get a multiple in that regard. But in a direct answer to your question, yes, there are certain businesses like Restoration Hardware, RH, which is one, Nike is another one, and certainly, CPRI is another one I threw out there that have had gotten beaten down and they're cheap enough on out your earnings. Where if you're a real long-term investor and don't want to play for a quarter or two and you really just want to invest and make like a multi-bagger over the course of a two or three-year time period, yeah, there's a couple of names out there we can talk about.
Andrew: Would any putting words in your mouth, visit, like you just did Nike, CPRI and RH, which are all, you know, all of them are more on the branded side than just your generic retailer. We mentioned Footlocker earlier, so I'll say like, Footlocker, two years ago, they were just a Nike reseller, right? Now, Nike cut them off from some of the high heat stuff. So, they're trying to diversify a little bit. But it sounds to me, like, you'd like a little bit more of the differentiated retail with a little bit of a brand, or is that just happens to be where these three are sitting?
Brian: You know what, I like great management teams with a great brand and a great vision and a great strategy. And this is a business retail where you ultimately bet on people and you bet on execution. And those people and the execution of a great strategic plan where companies invest through down cycles, I love when companies invest through down cycles. There are so many companies that hit this quarter and didn't guide down because they're cutting costs, they're cutting SGNA, like Wayfarer, like, thanks guys, like where's your top-line growth going to come from if you're laying off all of your employees?
When things get tough and companies invest and they put money into the model, then that's when we come out of the recession, we come out of whatever we're in right now, and they come out stronger, they take share, numbers go up, multiples expand and the stocks were.
Andrew: I haven't seen your note in a few weeks, but the last time I checked, you were a bearish Under Armour and bullish Nike. I mean, that's been a great trade for the past 15 years, let's say. But are you still bearish on Under Armour?
Brian: I'm still bearish on Under Armour. I don't think it's a raging short here, raging, I defined as being like 50% downside or better. But I definitely do think it should be a five-dollar stock. Under Armour, look, it was lightning in the bottle 20 years ago. Everyone thought it was going to be the next Nike and have like seven-year earnings multiple to it. But earnings are about the same now that they were 20 years ago. The problem is this brand has zero heat, like, zero. It's dead in the water. And it's got a new CEO, the CEO, Patrik Frisk, who is in place over the past four years, he cut every cost out of business. And you just heard me say how I love seeing companies invest in their business, invest in people, invest in town, invest in Sports Marketing, invest in R&D and getting a really hot product that the consumers got to have, and then convincing the consumer that they have to own it, and if they don't buy it right now, it's not going to be there anymore. Under Armour has done the exact opposite, and they have this new CEO who just came in from one of the hotel chains, and the only thing that would get me build up on Under Armour now, if either A, it was a three-dollar stock, or B, if this person came out and she said, know what? We're going to take our current operating profit margin, we're going to cut it in half, we're going to invest in R&D and marketing and product, and we're going to get some brand heat going again in order to get our top line growing, such that we can become a relevant brand in the eyes of the consumer.
Andrew: No, that's great. A, you mentioned Nike, so I thought everybody, and then B, as a generous, followed it from a distance for 10 years, and every time you look at Under Armour, it's like, it's a train wreck, maybe there's a brand there, maybe I can evolve, and the answer is always been just, don't touch it. You know, it's kind of the old, don't touch the second-rate companies, a sector. Let me ask one more question[?], do you cover Academy?
Brian: I do.
Andrew: Yeah. What do you think about Academy these days?
Brian: I think Academy is an interesting story. I don't know if now is the right time to actually go ahead and buy it, but like Academy is always mentioned alongside Dick's Sporting Goods. Academy actually has a leg up over Dick's Sporting Goods, and it's an emerging square footage growth story.
I've been covering retail for 30 years in the old days of retail, anything that had square footage growth to it always had a premium multiple. Academy does not have a premium multiple, it's really beaten down, it turns out the single-digit multiple, it's an emerging growth story. It had the CEO who came in after the KKR IPO, it was a [inaudible] deal. And the pandemic allowed them to completely right size the balance sheet, and now, focus on growth. This guy did a great job, his name is Ken Hicks, and he did a very good job, structurally taking up margins.
So, the debate in the Sporting Goods sector is because margins are very elevated vs. pre-pandemic levels, is to whether they're going to be sustainable and actually able to track for a multi-year time period where they are now, or they're going to mean revert. I think Dick's Sporting Goods is going to mean revert, I don't think Academy will.
Andrew: That's been one of the debates, right? I think a lot of people looked at and said, hey, Hicks came in, if I remember correctly, 2018, the pandemic is 2020, and then the big debate was, hey, margins went all the way up after pandemic. If you look right before the pandemic, it looks like Academy was starting to reflect and Hicks has a great reputation, people love them, he's retiring-- I think, this month, he's going to become the executive chairman, so I know a ton of long tour, terrified that he's going away and he was all the magic there, but the debate rages. Hey, our margins up because of what the team did, or our margins up because the environment got so good? And as you said, they're going to mean revert as soon as he's gone.
I knew several people who kind of pitch Academy, and they say, look, this is AutoZone 2.0, right? You look at the sector. And for those who don't know Academy, this might not be fair, or might be fair, but people can think of it as a discount Dick's, right? Like a value-driven Dick's. It's mainly the southeast, mainly Texas. But the argument is, they meet cash flow, the sector is decimated because all the Mom and Pops have gone bankrupt, you know, Nike cut their retail base, like 40 stores, and Academy just made the cut. So, five years ago, there was Sportsman-- sorry, there was.. Modell's went bankrupt, all the other guys went-- a ton of this change when bankruptcy, it's like, hey, it's a devastated structure, they've got an edge through Nike, they're only in the Southeast, so as you said, they get the square footage growth, and they meet money so they can both open stores and buy back shares, and that's going to be a great capital occasion story. People say AutoZone 2.0, I guess the pushback would be, hey, you know, they are just selling-- they do more than this but they're selling tennis shoes, right? You can get that at a Nike, you can get that online, like it's a very, very competitive space, where I think AutoZone probably had a little bit more of an edge there. Where would you fall on that story?
Brian: It's an interesting comparison. I think in the Academy, it's very much a hub for team sports, which is very big. I like that, it does more outdoors than Dick's does, and outdoors is probably structurally better now than it was pre-pandemic. So, for those reasons and because of what Ken Hicks did. And look, what can Hicks do, it wasn't him, like he hired a team-
Andrew: He wasn't personally going into the distribution centers and getting the numbers, yeah.
Brian: No. That's what great managers do. They hire people and empower them with capital budgets to hire more talent to build out an organization. And that's what Ken did. He's still there. He'll still be there as the executive chairman, non-executive chairman, I don't know, whatever his title is. But the fact is he's not completely going away. Management who is in place now is very good. And I believe the long-term story, I mean, if I were Big 5 Sporting Goods, I'd be quaking in my boots right now. Big 5, BGFE, is going to 0.
Andrew: I'm familiar. I mean, look, they are an example though. They're West Coast focused, right? But they got cut out of Nike, and it's, like hey if you're Big 5 Sporting and you don't have Nike, what is your reason to exist at this point? I'm sure there are other issues there, but that's got to be a massive one.
Brian: Yeah, they're up in the PNW and they're kind of the hometown Sporting Goods store, but you know, they're not making any money right now and Nike just fired them as a customer, and both Academy and Dick's are expanding into its territory. And you don't want to compete with those guys, you lose 99 times out of 100.
Andrew: This Academy's business model-- because I remember one of the things that attracted to me about 18 months ago was, you know, Dick's and Walmart, not completely, but they mainly turned off gun sales, and I think, 2018, 2019, I remember talking to some people from Texas, which Academy is not all Texas, but they've got a huge Texas base. And you could talk to customers who would say, Dick's doesn't share my values. I do all my shopping at Academy now because Academy shares my values, they sell guns, and Dick's doesn't. And that's nice for moody[?] reasons, that's nice for brand reasons, plays really well in the Southeast, were kind of strong. But, you know, I do worry, the map for Academy is all Southeast, and if there-- there's lots of Green Space there, right? Like they've opened a lot in Atlanta, there's a lot. But if they're going to go past the southeast, do you worry that that kind of, hey, we sell guns down home business model-- I mean, Academy, a lot of their advertising is around grills and stuff. Does that play as well outside of the southeast?
Brian: Yeah, it's a great question. I mean, the simple answer is, the best retailers, and I don't know if I'd put Academy in the best retailer category, but it is a very good retailer. They merchandised locally. One company, Hibbett Sports, used to be one of the best retailers out there. It's going to [crosstalk]. And they would literally, like, merchandise to two stores in the same town completely differently because one high school would have softball as a Fall sport, and another high school would have it as a Spring sport. That's how deep down into the local merchandising. And that's the kind of attention I love to see, attention to detail, I love seeing. So, as they move more into, say, blue states instead of red states, all they have to do is just not sell guns there. It's as simple as that.
Andrew: You mentioned Hibbett, do you follow Hibbett as well?
Brian: Yeah. Oh, yeah. I'm sure about that.
Andrew: What do you think about Hibbett? Because that's another one that, you know, it does have Footlocker as qualities to it, but I think their argument has been, hey, we are in our stores or in rural Mississippi, right? So, we're kind of immune from the getting cut off from Nike issue because A, we're not selling tons of high-heat products, and B, Nike's not going to go build a Nike store in rural Mississippi or, you know, deep Kenner, where it kind of Louisiana where I'm from. They're not going to build a Nike drugstore, they need something to showcase physical products. You know, they just took the guide down quite a bit and their earnings. Their earnings were a complete disaster, to be honest with you. But now, it's like they're treating at five times what you would hope is [inaudible]. What do you think about them?
Brian: So, I think it's actually trading at about eight or nine times earnings, what the real earnings numbers are. So, I still think of it as another guide down ahead of it. I like to think of Hibbett Sports as Nike's best off-balance-sheet asset. Basically, if Nike has an excess product like it's had over the past year in the apparel space, you know, it picks up the phone and calls up Hibbett and it says, you're taking this product, and Hibbett says, thank you. And they sell it, they take all the margin hits. If they do excess emails that "destroy the brand", then Nike smacks them down and they don't get allocations of Jordans in the upcoming quarter.
So, they're basically like a Nike Clearance channel. Nike will never cut off Hibbett ever. I don't know if that's a good thing or a bad thing, 78% of its store has a swoosh on it. How the board of directors allows that to happen is beyond me, but the fact is, that's what you got. That's a major structural risk because of Nike sneezes and they come up with a change of strategy, which they're going to have a new CEO in two years, and strategy might very well change, and Nike's going more direct as everybody knows. That's a huge risk for Hibbett. So, in the end, with Hibbett, I wouldn't buy it here. I think it's probably headed lower. There is a price I would buy that, but it's just probably about 20% lower than where it is now.
Andrew: That's another of the classic capital allocations. I remember flipping through 10Ks or 10Qs, like 15 months ago, and they bought 12 for-- if I remember the numbers correctly, in like July 2021 when sales were booming, right? They bought 12% of their shares, not in a quarter, not in a year, they bought 12% of their shares in a month. And I think it was about $70 or maybe $80 per share. And here, you and I are talking, June 2023, and the stock is what? 35? So yeah, you bought 12% of shares in a month when things were great. And now, the stock is way down, you'll notice they are not buying back shares currently and they've certainly got issues there. To ask you real quick...
Brian: Jump in, Andrew. That's a major theme you just head on, which really separates the great companies from the not-great companies. The great companies buy back stock when they should, and the other companies buy back stock when they could. And there's a big difference there. When you should is when your stock is beaten down, when you're missing numbers, when Wall Street hates you, when you're catching downgrades. And then there are other companies like Ulta was buying back stock over 500 dollars, target buying back stock over $200, Hibbett buying back stock at 70, $80, just because the cash flow happened to be there. They're very poor stewards of capital. They should have held on to the cash, wait until the cycle turned, which was inevitable, and then, step into the market and buy back stock, or pay special dividend, do whatever you're going to do, but just do it when you should do it, not when you could do it.
Andrew: You know, look, I absolutely hear you. It's also tough though because you're these companies, you get all this excess cash rolling in. I mean, just so many companies have done it, but you get all this excess cash rolling in, you think times are better. You know, you did have a lot of competitors closer, and COVID. You don't think it's going to go away, and you're like, my stocks' sitting out here at 10 times earnings, let's go create some shareholder value, let's run the AutoZone model. But yes, so many of them did that.
Just on RH, which we mentioned, I want to go to some other names, but on RH, just on that, they have done an incredible job of capital allocation, right? And reading their earnings calls, they're always fun because they will be very direct. My favorite is, we've got an economic storm coming. People aren't prepared for the hurricane that's coming. By the way, we're super excited about our new growth initiative. Custom yachts for the super-rich. I just love the dichotomy you get there in a call there. But you mentioned they buy their stock back when they should, and they have done a great job of that. One thing that I've always looked at RH is, hey, just don't buy the stock until they're buying stock back, and they're still not buying stock backing yet. So, is that a sign? Maybe, hey if you're tr-- Yeah, if you've got a five-year time horizon, today is probably a great time to buy it if you believe in the brand and the story. But if you really try, well, should we maybe wait until they're giving us the all-clear in buying back shares?
Brian: That's a great question. I would own some RH here, period. So, we can get tactical and say, do you want to wait for a pullback and buy it closer to 200? This is a name, I think it's going over 1,000. So, this is a really, really big idea over a tail duration, which we define as being three years or less. I've got earnings going into about 55 or 60 dollars. The consensus is about 20. There's so much top-line growth here ahead of this company through, not its yachts and its jets, that's all BS that I wish the CEO wouldn't even talk about. That's just marketing that pays for itself. They're not brand initiatives, he wants to sell more couches, like what you have in back you there-
Andrew: That is not a Norwich couch. My wife would kill me if I even let somebody believe that. That is secondhand, a friend was moving out of their apartment and they gave us that couch for free.
Brian: Well, it looks RH. But anyway, Gary's all about selling more couches, and this is a very big year of RH, they're going International this Saturday, June 3rd. They're having the grand opening of their store in England, which is a very big deal. And what you have to think about is not them opening up a store, they're opening up a country. So they open up the e-comm business and they introduced this brand to a whole new country. And England is relatively speaking around the size of California, which is around 500 to 600 million dollar business for RH. There's no reason why it can't match that.
And I get a lot of pushback here. People think that the Europeans won't accept the US look of furniture. Well, 80% of the designers at RH are European. It's us who have adopted their look. And RH, like we talked about with Hibbett in the old days, they're going in and they're micro merchandising. So they're selling a certain product in the store outside of Oxford. It'll be very different from what they sell in central London, where people have small flats and need small furniture and have very different tastes. It will be different from what they sell in Paris, in Brussels, in [inaudible], in all these countries that they're opening up over 18 months. So, I think you have a huge, huge growth driver here, and I would expect that once there was proof of concept that it actually does work over in Europe, that's when you're going to see the company really step on the accelerator and buy back stock. And I'm not talking about three, four hundred million out of the clip, I'm talking like buying back a billion, two billion dollars worth of stock.
Andrew: That's great. One name that a couple of friends have been around with me, which I think is kind of controversial. I don't know for sure you cover, but I'm guessing yes. William Sonoma, WSM, and I think the pitch I've gotten from friends, I haven't really dug into it is, hey, if you look at West Elm, West Elm's results are absolutely incredible. Like, people don't think of it like an RH and they should. I'm a little skeptical of that, but the numbers, they have put pretty good numbers at West Elm Pottery Brands, probably a nice brand. What do you think of William Sonoma?
Brian: I think he's a piece of garbage.
Andrew: I had a suspicion, that's what you're going to say. But I'll tell you, I get people who think it's the greatest deal ever, and they think people like you will just ignore the numbers, and then I have a lot of people who told me the same thing. They think it's absolute garbage.
Brian: Yeah, management is terrible. There was one executive that had any credibility with the street and with me, and her name is Julie Well, and she's now the CFO of Expedia. So, you have a nice upgrade at Expedia, but now, there are no more adults in the room at WSM. This company is promising-- promising, guiding, the same thing. Plus or minus 3% income this year. I will give you any of these guitars on my wall if they hit that comp number. It is not going to happen. The consumer is going to get worse, business is going to get worse. The only way they hit those numbers is if they step on the gas pedal, the accelerator on the promos and they discount their product in order to drive the consumer into the store. That's their model, it's how they've always worked, it's how they're going to work again. The company are in $16 last year, the consensus is that $14 this year. I think the company would be lucky to earn ten bucks. As a matter of fact, I'm at eight bucks.
Andrew: Well, you know, I hope they hit the promos and hit that about flat guidance because then even if they do it at a super negative margins, I'm going to be claiming one of those guitars. I don't play the guitar, but I'll figure out something to do with it.
Let me quickly flip to one that you've been bears for a while. I even followed in while, but I am interested, because I do have some friends who still ping me on it, and I used to love this doctor, I never got long it, but I love the company and I've probably children the company, Peloton. The stock has just been absolutely dead and down, I know you're bearish on it, are you? Where the last time I checked it, I don't know if you flipped on it, but I guess the thing a lot of bullish says, yeah, they got way over their skis during covid, you know, I would ride my Peloton every day during covid. I'm sure there were a lot of people. And now, you know, I might ride it once a week at most or something, so I'm sure I'm not alone in my usage fell off. They way overplan, they got too much inventory, all this sort of stuff. But I have people who look at now and they say, hey, they've kind of stemmed the bleeding and members. I think they're connected, their members have been growing up recently. And if you just look at this as putting them all on the subscription business, it is really cheap, and Barry is very incentivized to turn this around and get it sold at some point. I'm a little skeptical, who would be there to buy it? But I'm sure they could find somebody to do it. I don't know. I'm rambling a little bit. Tell me why you're so bearish on Peloton.
Brian: Yeah, so I'm not average short Peloton here, we were and we covered early. But there's also no reason why this can't be a three-dollar stock. So, if you ask me, Brian, you have to do something on the Peloton right now, buy it or sell it, I'm selling it. You're right in that the CEO is incentivized to actually get something done here. That's something is probably a sale. This company has a balance sheet problem. It's got a lot of debt. And that's something that a lot of equity investors don't pay enough attention to, and they should. But the bike business, you said it, got way, way over its skis. My Peloton is like a very expensive like coat hanging rack. I've got clothes strewn all over it. But there will be value to somebody there, whether that's Apple, Apple's not big on acquisitions, but it does like customers, maybe Amazon, fold them into the ecosystem. Amazon, you know, is now exploring a mobile network, which I think is an interesting way to get Prime Subs, more Prime Subs, which is what Amazon is all about. So, I could think of a couple of techy companies that might be interested in buying Peloton, but just not at this price. I think there's a chance that a deal could be done at a bankruptcy court, but this stock, I think, is headed lower.
Andrew: On acquisition, so I certainly hear you on, hey, Apple could buy them, like the Peloton brand does fit pretty well with apple brand premium product in the home. There'd be some integration, you know, they watch integration all sorts of stuff. Apple's obviously moving until. Amazon, I just have trouble seeing Amazon buying them because, you know, Prime is-- how much is Prime nowadays? 199 a year? The Peloton membership is $40 a month. It's a very weird thing to bundle into each other. The brands don't super match, you know, Amazon's for everyone, Peloton is kind of an upscale brand. And Amazon's trying to buy iRobot, and the government has a problem with them. Like, if the government has a problem with iRobot, how are they going to feel about Peloton? Aside from Apple, I just really struggled to see who a buyer is. You know, like [inaudible] it took a bath on mirror, I don't think Nike's going to go out and buy Peloton or something. I have a lot of trouble seeing who the buyer could be.
Brian: I will give you two guitars if Nike buys Peloton.
Andrew: Man, I'm going to have your whole guitar collection by the end of this podcast. We flip through several names, I've got a few more we go through, but I'll just sort of, what other names are interesting, either long, short, that you're following, that people should be thinking about?
Brian: So, Nike, I think, is definitely one long side. There are a few reasons why, A, it's Nike, it's a premium brand, it's now 40% DTC, meaning that it sells straight to the consumer instead of going through a Footlocker. There's this new category of luxury sneakers which is emerging now. I don't know if you've heard of Golden Goose, which is, it's a very popular brand now, they sell 700 dollars sneakers, Nike and-
Andrew: Is that Nike?
Andrew: That's Nike or that's just a new brand that Nike's going to...
Brian: No. Oh, no, no, that's an Italian brand, it's independent, it's likely to IPO later this year and it's going to be a hot deal. But there is this new category of luxury sneakers whereby people go to work, even if they were a suit, they're probably wearing a pair of Jordans or a pair-
Andrew: I'm all in on that trend. I mean, I don't wear a suit, it's on anymore, but the... what's the Rob Gronkowski shoes that he does, that he sponsors? I've got them, they're nice... they look kind of dressy but they're sneakers. I got two pairs, I absolutely love them. So, I'm all in on this sneakers-with-your-suits trend.
Brian: Yes. So, sneakers are, if you're the kind of brand that's got pricing power and if you've got the consumer connectivity that Nike does, your price points are just racing right up. So I think we have a secular trend over a multi-year time period, where the average price point, or ASP as we call it, is just going to go higher and higher and higher for Nike. At the same time, it's mix of business that's DTC, as in it sells-- you go to nike.com or you go to the sneakers app, it's just going to go up, and it keeps so much more of the gross profit dollars there.
And I juxtapose that against John Donahoe, who's the CEO of Nike. Look, I used to work at Nike. I know this company really well. John is the best CEO Nike has had since Phil Knight stepped down, and there have been a few.
Andrew: On Nike. So, I hear you, I love the Nike brand, I've always been a big fan. I can't tell you how much, like I'm looking at my laundry pile right now, I can't tell you how much Nike is in there. But if I look at Nike and my Bloomberg crash, so I'm just pulling up Yahoo Finance, but trading about $110 per share, Yahoo Finance has that at 30 times price earnings, right? Is that right? Is that wrong? I'm sure it's in the ballpark over the Nike trade. And if I just look at that and say, okay, cool, great company, no disagreement, their margins go up as they go more DTC, they probably have pricing power, you know, inflation should be great for a company like Nike because they have pricing power, they can probably outpace inflation. And as it cools down, you know, but 30 times price earnings, right? Like, there are a lot of really cheap stocks right now, we're not in a zero percent interest rate environment anymore. You know, we can go get two-year treasuries at 5.5%, which would yield more technically than Nike on price earnings. Obviously, longer term, but am I really going to generate Alpha getting Nike at 30 times price-earnings?
Brian: No, you're not, but the question to ask is, what the real earnings number is next year and the year after that? And if my numbers are right, you're getting it at 18 times 2 year out earnings. So, what I always look at with Nike, is I look at it relative to LVMH, which is probably one of the best run companies in the world in any industry. In LVMH, you can buy now, and I happen to be along that. You can buy that now at 25 times earnings. So, if I'm going to buy Nike at 30 times earnings or LVMH at 25, I'd rather go LVMH. It's kind of a no-brainer.
Andrew: What LVMH has done? So, we were along Tiffany's during the during covid when LVMH tried to back out and they got that little discount. I don't follow LVMH super closely, but every now and then, I'll look at Tiffany's just because of that history. And what they have done with that brand is absolutely incredible. And I think they're just, I think they've kind of said, we're just starting to scratch the potential or like really see the acceleration, but I think they 5x turning since they closed that deal, and obviously, they were covid-19 and stuff but they have just really flexed every muscle that they have on that brand. It's been unbelievable.
Brian: Yeah. 5x sounds a little heavy. I think it's closer to 3, but you're right directionally-
Andrew: I might have been thinking off like covid effect and numbers or some, but even if it's three, I mean, it's just an incredible deal. They've been unbelievable at it.
Brian: Which actually, just, and I know we're talking about Nike and LVMH, but one name I'm sure does, Ralph Lauren. Ralph Lauren is trying to elevate its brand. The problem is, is that it's taking a price in the past quarter, and this last quarter was up 12%, but total revenue in constant currency was up only 9%. That tells me that the units per transaction are coming down or its firing its customers. I don't think Ralph Lauren as in Mr. Lauren, I don't think he gives a crap about the quarter or the year. He's 83 years old. I think he cares about his exit strategy. He had conversations with LVMH a couple of years ago about doing a deal, and it didn't get done, and I think it was because LVMH viewed Ralph Lauren as being to mass market. So, my conspiracy theory around this is that Ralph is going to miss this year, is going to miss next year, but it's going to continue to make the product better, and then LVMH is going to swoop in closer to 80 bucks a share. The stock is now trading well over a hundred, and is going to buy Ralph Lauren.
Andrew: Interesting. Hey, let me come back to... That is a very interesting theory, but let me go back real quickly to, I guess on that theory, it does in a backwards way. It reminds me of Michael Dell when he took Dell private in, what? 2013? And he completely destroyed the PC market for two years, took all the profit, not just out of Dell, but out of the whole market, then low-balled his shareholders, took it private, and made an absolute fortune on that deal. It kind of reminds me of that, right? Ralph Lauren needs an exit strategy, they do everything you can to get the company to where it can sell, even if, you know, short-term, stop paying, just to get your exit strategy.
Let me go back to CPRI real quick. That was the company, CPRI, you mentioned at the start, Versace, Jimmy Choo, Michael Kors, look, I know absolutely nothing about luxury brands, but I have had friends who pitched CPRI to me before, and I think the debate that they've had is like, hey, Louis Vuitton, like, that is luxury, luxury brand. Is CPRI just like a step below that so where they don't have the same mu-- they don't get the same multiple? And it's not something that, you know, Louis Vuitton or a lot of buyers would be interested in, and maybe private equity at the right price, but you're not going to get that strategic multiple, if that makes sense?
Brian: Yeah. So, there are two ways I can answer that. One is, as a standalone company, right now, CPRI trades at five times earnings. So, my argument is that it should get a tapestry multiple of 10 times earnings and it'll put up numbers that will get it there. So, that's point one. Point two is that, CPRI owns Jimmy Choo, which is a luxury brand, and Versace, which is also a luxury brand, which is in much better shape now than when they were up for sale 3-4 years ago when CPRI bought them. They were just brands with no company built around them. And what management did, CPRI, is they actually built an organization and an infrastructure in order to grow these brands. That's exactly the kind of company that LVMH and Kering would want to own. So, if you're a PE and you want to buy this company, you sell these luxury brands off to the highest bidder, which funds the entire transaction. And then, you're left with Michael Kors, which is just your cash cap.
So, to be clear, I am not saying that this should get an LVMH multiple, never in a million years. Should it get 40% of LVMH multiple? Yeah. I think it should. Not 20%.
Andrew: Gotcha. Gotcha. And I guess they do have a history of share repurchases. So, while you're waiting, do you think-- so you think it's a near-term thing that probably if it gets older, you think you're just kind of looking at it, saying, hey, the math makes sense, and if the math makes enough sense, eventually, something will happen.
Brian: I think if it stays at this price, something has to happen.
Andrew: Cool. Anything else in retail we should be talking about on the long, short, interesting side?
Brian: Oh man, I could talk about any topic you want. One name I absolutely hate, hate, hate, there are two, actually. One is a company called Helen of Troy.
Andrew: Oh, so Helen of Troy, do they sell condoms in there? Do they still have-
Brian: No, no, they sell those.
Andrew: Helen of Troy, they reported earnings, what, like a month and a half ago? And it was a slight beat and the stock squeezed. All my long short friends, I was trying to talk to him that day, and they're like, we can't talk! Helen of Troy squeezed and we have no clue what the hell is going on. But please, tell me why you hate Helen of Troy. What's going on with that?
Brian: This company is good at one thing. It's good at using a zero interest rate environment, which it had for a generation, and it's good at buying average companies at peak multiples when the brands are hot, and then using special charges, non-cash charges, or getting people focused on non-cash earnings, I should say, as being what the real earnings number is. So, it's this card game here and it's really a house of cards, and I think it's kind of fall down. The game the company play is over, it is completely over. It's levered up, it can acquire any more brands and can acquire any more growth. All the brands that owns like Hydro Flask and Osprey, they're fine brands, there's nothing wrong with them, but there's a higher price competitor above them, and there's like a thousand below them.
Forty-two percent of sales come from Amazon, Target and Walmart. These companies are cutting out brands in the middle. So, the company is going to keep losing Sharon, its core business. And because it's not doing any more acquisitions, it can take special charges. So, the gap earnings of 10 dollars is going to mean reverting back to what the real earnings are, which is going to be closer to 3-4 dollars a share. So, you had a CFO who left last month. A couple of weeks ago, the CEO announced that he was out. Management knows that this game is over. So, I won't cover this until it's a $30 stock.
Andrew: What's the bull case here? Because I'm being serious. I've had four friends, at least, and I don't have-- most of my friends are more long focus than short focus, but I've had four friends at least who have told me they're short [inaudible] in pretty big size. I mean, is the bull thesis, hey, we didn't do enough work here and the core earnings number is about 10 that they present, so, you know, it's a $90 soccer by net nine and that's pretty cheap for consumer brands, or is there something smarter here?
Brian: It's that, the company is going through a cost-cutting program here. Which again, you know, my feelings about cost cutting, I don't like it. And there are people who point to certain points in time and say that, no, this company is actually really good at running brands. I don't know what the hell they're looking at because it's not the same data I have. All I see is deceleration, but, you know, the other people who are bullish are going to point to the fact that the company just put down organic sales across its whole portfolio of 20%, down 20%, and that we simply have hit bottom, and it's one of these companies where numbers just can't get worse. And I vehemently disagree with that statement.
Andrew: Let me ask one last question, Brian. So, I said at the beginning, as I prep for this podcast, I listened to an interview with you from back in January or so, you said, hey, I can't wait, I'm super bearish but I can't wait till the April/May timeframe, where things are going to be worse and I'm going to be bullish. Now, we're in June, I think you think the environment is deteriorating but probably the market and companies haven't appreciated how much the environment has deteriorated. So, you're still bearish, and you can tell me if I'm reading any of that wrong. Do you think, if you come back in and you're welcome to, six months from now, right? You and I are doing an end-of-the-year wrap-up, would I be right to say if you had a crystal ball and-- nobody's got a great crystal on this forecast, but your crystal ball would be, hey, things are 10, 20, 30% lower. And now, you're bullish because the market has self-correct, the markets corrected or maybe overshot on all these businesses. Is that kind of how you think this all plays out?
Brian: Yeah. I think it does. And I'm currently thinking around the September timeframe because I think the back-to-school season is going to be super important this year. That's going to be when we're going to see the rest of these companies guide down in a big way that already didn't. So come the Goldman conference in the first week of September, it's going to be a super bearish conference. And I think the prices of most of these retail stocks are 20 to 30% lower, at that point, earnings expectations should be 20 to 30% lower. At the same time, we've got some kind of visibility towards the consumer improving, and if we have a positive rate of change with trough multiples on trough earnings, that's when I want to be buying retail handover first.
Andrew: And as you said, at some point, like these things get started to get cheap enough where retail has always been a favourite place for private equity to play, there is still a lot of private equity drive pattern [?] on. Interest rates stabilized, maybe the tax here is 10 or 20% lower. At some point, you're going to start seeing private equity players start picking a couple of these guides off, and that always brings some juice back to the spaces. Everybody starts saying, oh, you know, the smart money's here. They think things are cheap, who could be next? Let's get in front of this. Let's take advantage of that for ourselves.
Brian: Exactly. Yeah.
Andrew: Well, Brian, you know, September says it sounds like we might have to... have you back on in the Fall timeframe to see how back-to-school when and maybe talk about starting to get more along these things. But this has been fascinating. Look, again, I'm a generalist, I tend to deep dives into single companies on these podcasts, this has been awesome to so many companies that I've generally followed or been interested in, this has just been really great. So Brian, looking forward to having you back on, and thanks for coming on today.
Brian: Thank you, man.