This is a companion piece to yesterday’s “What am I missing with cyclicals” post. I’d encourage you to read that for full background, but the basic story is my number one prediction for 2022 was deep value retail and cyclical commodity stocks outperform
So stuff is now going for 10x FY19 EBITDA or for 5x LTM EBITDA -> is this actually cheap on a historical basis? If you look back at historical trading multiples (2019 year end TEV / FY 2019 EBITDA) is today's level really that cheap?
Let's take Dicks (DKS) for example. TEV/LTM EBITDA is like 5x. YE18 TEV/FY18 EBITDA = 4.5x, for 19 it was 4.8x, etc. It doesn't seem particularly cheap to me. I will also say that ROIC has trended down compared to past years and inventory turnover is at a historical low (3x /year), though this isn't surprising given the supply chain issues now. Anyhow, I don't see how DKS is particularly cheap.
I remember reading Einhorn's letter about how various cyclicals / capex heavy old industries trade at disgustingly low multiples. Various fund managers pitch these and they don't move and their fund collapses, further driving selling pressure. Perhaps a dumb question, but what's preventing this from being a value trap?
Also just a curiosity:
How come you look at EV/EBITDA instead of (EV+leases)/EBITDAR? A nitpick I guess so it doesn't really matter to the directionality of your argument.
How about HIBB short and DKS long? That is Brian McGough idea from Hedgeye. Didn't NKE kick HIBB to the curb? Where are they going to get premium sneakers?
I think this theme would be a lot more compelling if the numbers on a 2019 basis were a lot cheaper; as is, it's hard for me to get excited about any of these names when management hasn't yet proven they can really capitalize on this incredible opportunity they've been handed.
Yes, they've had a huge boost in revenues/FCF/etc, have fewer competitors, and so on... But that's all just from them kind of "winning by default" as all these other players shuttered. It's not clear to me that they'll be able to continue to win, especially when the same landscape changes that benefit the incumbents have created a ton of space for new entrants.
In other words: things have consolidated, but what if they consolidate further? Or what if new competitors emerge and snatch the opportunity away? If these names were at, like, 6x 2019 EBITDA, then I'd say "fuck it, hard not to win from here". At 10-12x, I feel like there's only half an idea here — where's the story about how this all keeps coming together and I'm not going to be stuck with just another middling retailer, limping along?
It might be that management teams have finally got religion and learned that there is more money to be made if they move away from aggressive discounting which would suggests that profits are more sustainable than bears expect. Ah yes you will say but once the supply chains normalize they will return to their old behavior - but maybe not - look at Next in the UK - classic mid market retailing - has been extremely successful in part by focusing on full priced sales and training the consumer the only time you get money off is the biannual sale where all sale items are at least half off - this is also inline with the demands of the major brands who do not want their brand image undermined by aggressive discounting
Also the other part the bears miss now is that these retailers are not increasingly multichannel with 30-40% online post stores re-opening and have relatively short leases so can aggressively exit underperforming locations - this willingness to close stores also helps the balance of power vs landlords when it comes to setting rents at sensible levels. It is also worth noting that online darlings - WRBY and Birds are all adding stores so stores - yet because they started online first and opened stores later these guys are going to be the winners - not sure it should matter which way you attack the problem so long as your flexible with your store base
For the sporting goods guys the key threat (and potentially opportunity) is the major brands (Nike etc) continuing to move to DTC - it is far more risky if you are reliant on selling someone else's brand than your own - unless your are one of the winners who still get an allocation - in which case Nike etc restricting supply is a huge benefit for you in driving traffic to your store - this is the key thing to focus on - do you have the favor and can maintain the favor of the key brands you rely on
So stuff is now going for 10x FY19 EBITDA or for 5x LTM EBITDA -> is this actually cheap on a historical basis? If you look back at historical trading multiples (2019 year end TEV / FY 2019 EBITDA) is today's level really that cheap?
Let's take Dicks (DKS) for example. TEV/LTM EBITDA is like 5x. YE18 TEV/FY18 EBITDA = 4.5x, for 19 it was 4.8x, etc. It doesn't seem particularly cheap to me. I will also say that ROIC has trended down compared to past years and inventory turnover is at a historical low (3x /year), though this isn't surprising given the supply chain issues now. Anyhow, I don't see how DKS is particularly cheap.
I remember reading Einhorn's letter about how various cyclicals / capex heavy old industries trade at disgustingly low multiples. Various fund managers pitch these and they don't move and their fund collapses, further driving selling pressure. Perhaps a dumb question, but what's preventing this from being a value trap?
Also just a curiosity:
How come you look at EV/EBITDA instead of (EV+leases)/EBITDAR? A nitpick I guess so it doesn't really matter to the directionality of your argument.
How about HIBB short and DKS long? That is Brian McGough idea from Hedgeye. Didn't NKE kick HIBB to the curb? Where are they going to get premium sneakers?
I think this theme would be a lot more compelling if the numbers on a 2019 basis were a lot cheaper; as is, it's hard for me to get excited about any of these names when management hasn't yet proven they can really capitalize on this incredible opportunity they've been handed.
Yes, they've had a huge boost in revenues/FCF/etc, have fewer competitors, and so on... But that's all just from them kind of "winning by default" as all these other players shuttered. It's not clear to me that they'll be able to continue to win, especially when the same landscape changes that benefit the incumbents have created a ton of space for new entrants.
In other words: things have consolidated, but what if they consolidate further? Or what if new competitors emerge and snatch the opportunity away? If these names were at, like, 6x 2019 EBITDA, then I'd say "fuck it, hard not to win from here". At 10-12x, I feel like there's only half an idea here — where's the story about how this all keeps coming together and I'm not going to be stuck with just another middling retailer, limping along?
It might be that management teams have finally got religion and learned that there is more money to be made if they move away from aggressive discounting which would suggests that profits are more sustainable than bears expect. Ah yes you will say but once the supply chains normalize they will return to their old behavior - but maybe not - look at Next in the UK - classic mid market retailing - has been extremely successful in part by focusing on full priced sales and training the consumer the only time you get money off is the biannual sale where all sale items are at least half off - this is also inline with the demands of the major brands who do not want their brand image undermined by aggressive discounting
Also the other part the bears miss now is that these retailers are not increasingly multichannel with 30-40% online post stores re-opening and have relatively short leases so can aggressively exit underperforming locations - this willingness to close stores also helps the balance of power vs landlords when it comes to setting rents at sensible levels. It is also worth noting that online darlings - WRBY and Birds are all adding stores so stores - yet because they started online first and opened stores later these guys are going to be the winners - not sure it should matter which way you attack the problem so long as your flexible with your store base
For the sporting goods guys the key threat (and potentially opportunity) is the major brands (Nike etc) continuing to move to DTC - it is far more risky if you are reliant on selling someone else's brand than your own - unless your are one of the winners who still get an allocation - in which case Nike etc restricting supply is a huge benefit for you in driving traffic to your store - this is the key thing to focus on - do you have the favor and can maintain the favor of the key brands you rely on