Hey friends! Ayesha and I collaborated on this research to bring you some observations from the recent Goldman Sachs Retail Conference, and trade ideas that came from reviewing the companies covered.
Retail remains an overall short due to larger macro factors and fundamental deterioration as a result.
Li Fung sees orders coming down 35-45% in 2H, 2022. Li Fung is one the of the largest supply chain and logistic solutions provider for the garments and retail business, headquartered in Hong Kong and facilitating orders from the Asian manufacturing Hubs.
Continuing Geopolitical Tensions not just in Europe but in other parts of the world. Furthermore, garments producing countries are under serious pressures from rising costs and gasoline prices.
Pure DTC brands are looking at Brick and Mortar (this will add to costs) - with margins already being compressed, this won’t be a great idea. But, the demand seems to be for mall / store shopping.
Online acquisition costs are also increasing which mean that the edge that DTC once had is becoming more and more marginalized.
Inventory overhang remains a concern.
Most companies are still citing the strength of the consumer but let’s not forget that the stimulus and benefits ended Sep 2021 and since then, the consumer has experienced a significant increase in their daily expenses. Therefore, discretionary spending has been and will be severely impacted.
A few companies did note the foreign exchange risk with the dollar still being strong and a major portion of their sales coming from overseas.
Signet keeps citing 40 year high in weddings but, looking at the numbers seems to suggest the trend hasn’t increased overall by that much. The wedding forecast is based on venues booked. Not to sound pessimistic but the question remains how many of them will actually follow through.
Self purchases are coming down but considered purchases are resilient so they are hoping for a great holiday season. Signet caters to extremely discretionary spending during an environment where consumer budgets are shrinking.
The company is banking on the holiday season based on considered purchases (need to determine that amount). Revised earnings up after down.
Since earnings are the second week of December, there is an opportunity to exit before that and still have plenty of time for the trade to play out.
Fundamentals
Blue Nile acquisition: all-cash transaction of $360M
Total sales were down 1.9% in Q2 and same-store sales fell 8.2%.
Same-store sales were down 8.7% in North America and declined 1.5% for the international markets.
Non-GAAP operating income was reported at $193.2M vs. $223.0M a year ago. Operating income as a percentage of sales fell to 10.6% vs. 12.6% a year ago.
Next Earnings - Dec 12, 2022
Technicals
Having fallen below a significant area that was where a lot of demand it’s reasonable to assume there are a lot of trapped buyers in this name as we’re under $57.71.
A reasonable initial downside target is $49 with a secondary price target of $39. Failing that level runners could exit around $31 if it were reached.
Because earnings are on December 12th, 2022, an exit before then would be a good strategy to consider.
Priced as luxury and trying to position as such but their offering is still very limited. Certain luxury retail is still doing well and they’re counting on that trend to propel their brand.
They’re also counting on China and hoping for revenge spending once the Covid lockdowns are lifted.
They expect margin expansion and claim to be well positioned for the current inflationary environment. As of their last earnings call, they increased prices which were apparently received well.
We think the company is overly optimistic and will not be in a position to maintain their gross margins, let alone achieve the level of sales that they are forecasting.
The Company has a significant amount of Debt at $490M vs. Cash of $227M.
Next Earnings - Nov 08, 2022
Technicals
Would look for a rejection at the MA(50) and supply overhead around $19.5, which would open up a move downward to $15.5 and then potentially $13.35 around the Covid crash lows. There is a significant amount of supply that’s built up overhead going back from the stock’s earliest days in 2017.
Moving below $19.5 decisively on a rejected re-test brings about a potential of window of opportunity for a favorable risk reward short.
This could be potentially be either a share or options opportunity. For puts a calendar spread may be reasonable way to approach hedging premium erosion risk.
Because earnings are on November 8th, 2022 an exit before then would be a good strategy to consider.
Capri Holdings Ltd ($CPRI)
China revenues were already down 40% YoY and they expect them to be down 10-20% for the remainder of the year.
The company cited maintaining margins by increasing prices for their Michael Kors and Jimmy Choo brands. Given the luxury / semi-luxury appeal of these brands, they can probably get away with some price increases.
They discussed spending $300 million for Capex to expand their business through new stores, renovations and enhancements in e-commerce.
A lot of the spending done during the Covid era was because people were not spending on travel, leisure and eating out and therefore, could afford more expensive purchases. Women in particular were not spending on beauty products and probably shifted spending to these goods.
Despite the company’s claims of maintaining gross margins and strong sales momentum, we see the spending on these products as highly discretionary and likely to suffer in the coming quarters.
Next earnings - Nov 03, 2022
Closing below $41 would open a significant amount of potential downside in this stock to $34.7 and then a more aggressive target for runners would be $29.4.
There is some potential weak support around $38.78 worth watching on the way down. A break of it may add to conviction of these downside targets being reached. Breaking above $43.50 on a daily close would have me exit the position.
There is a large pocket lacking liquidity that we can see on the chart where prices are likely to be quite volatile.
The time horizon is is about two months for this trade. Because earnings are on November 3rd, 2022 an exit before then would be a good strategy to consider.
On Holdings ($ONON)
Footwear tends to be more resilient in the current environment.
ON still has a long way to go in catching up to the major players like Nike or Adidas.
We don’t believe the company will collapse but their share price has already come down by over 50% in the last one year and there may not be much more room to the downside.
However, we also don’t see much room to the upside with the current macro environment given their niche appeal. It will likely be a very slow climb from here for the company.
Next Earnings - Nov 16, 2022
Technicals
Consolidating off of a potential area of support around 16.16-16.73. There’s a reasonable amount of support within this area of price from previous transactional activity.
The technicals seem to reflect the overall neutral assessment of the company itself. No strong bias long or short so prefer to stay on the sidelines.