07/23/20 11:21 AM EDT
Retail Position Monitor Update | TSCO, NLS
Takeaway: TSCO acting as if the world hasn't changed, we see clear EPS risk. NLS can leverage the home fitness boom into near term sales ramp.

TSCO Adding to Short Bias List

  • TSCO stock has more than recovered from the March selloff as the stock echoes prices seen back in early December.  We think this presents an opportunity short side with the stock near 19x earnings and street expectations still reflecting positive comps and EPS growth in 2020.
  • TSCO fared relatively well in the last recession though comps and earning still went negative, and that was back when it was still growing square footage near 10% vs low to mid SD today.   It also has done well historically in Macro Quad 4 (the 2Q setup), but does worst in Macro Quads 2 and 3 (the current probable outcome of 2H2020)
  • The company reports earnings Thursday, though the company preannounced 1Q results a couple weeks back including 4.3% comps with March up 12% as key consumable categories were up over 20% but other categories lagged.  We suspect comps have moderated significantly from the late March levels, as had been the case for many retailers after the initial ‘stock up’ period of Covid-19.  The necessity items will continue to sell (livetock/pet categories are 47% of sales), but other categories will suffer, as stores see less overall traffic and less attachment.  At the same time the ecommerce business is seeing significant traffic, where sales with minimal store pickup attachment should be at least moderately margin dilutive.
  • The rapid general commodity deflation could put pressure on feed prices which perhaps gives a little margin tailwind, but comp headwind (in what should be the best performing category) going forward.
  • We think the economic impacts of Covid-19 are undeniable, and that will mean discretionary spending pressure that will make TSCO sales and earnings expectations harder to meet.  Even if you think retail/restaurant jobs come back in the summer (which we think is unlikely to limited) the energy economy is in disarray, small/medium sized energy companies will soon be facing bankruptcy, meaning job losses in rural energy markets close to where TSCO finds many core customers.
  • We think the short makes sense on the points listed above, though last but not least, is the Coronavirus.  So far news and ‘lockdown’ environments have been focused in US urban areas, but the virus is growing in rural counties.  As areas of the US start to relax social distancing actions, we think the virus will continue to be what it has proven to be, highly contagious.  That means hotspots could start to form in areas that had previously felt isolated from the virus outbreaks in cities.  Those areas are again where TSCO finds more of its core consumers.  So as the expectation is for TSCO to see positive comps, and the US consumer economy start re-opening, we think spots where TSCO calls home might start having to go into lockdown.  Our Hedgeye Healthcare team has been tracking the county level case data, and we’ll be working with them to flag whether virus trends mean net ‘opening’ or net ‘closing’ as it relates to the specific  areas where TSCO stores are located.

NLS Adding to Long Bias List

  • For those that can do micro caps, we think NLS Nautilus Inc. (Owner of Nautilus, Bowflex, and Schwinn Fitness) makes sense for a trade/trend long play.  The stock recently saw a notable bullish phase transition on accelerating volume within Keith’s quantitative model.
  • The stock move came after the company preannounced sales for 1Q at +11%, the first time sales grew since 3Q18.
  • The incremental demand makes a lot of sense.  The narrative in the market has been all focused on Peloton, but every maker of home fitness equipment is benefitting as people shop for solutions to a closed gym.
  • In fact, within top selling items are the Bowflex C6 and the Schwinn IC4 bikes that are knockoffs that directly compete with Peloton but at less than half the price ($950 and $800 respectively) with no monthly subscription.  In fact sign up for a digital only Peloton 90 day free trial and you have a decent streaming cycling experience for your first 3 months of quarantine at a much better price than Peloton. This type of option makes a lot more sense for a larger portion of the US and in a way NLS can profit over the near term over PTON's marketing spend and fitness content creation.  Also, Nautilus is much more than bikes, it does ellipticals, treadmills, rowers, home gyms, and weights among other products. Demand was clearly strong in March and we think the demand has continued into April evidenced by Google Trends.
  • With low street expectations, easy compares and accelerating revenue, we think it’s a long at only 0.5x sales, well below 2 year highs on EV/Sales multiples.



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