Proving the Doubters Wrong? - ETSY
When I heard the Macy’s - M - buyout was falling apart, I thought it was a good time to check in on retail stocks. I was surprised to find very little of interest. Retail stocks are similar to restaurant stocks. Retail stocks are usually easy to understand, and can often have short-term problems. What I found was different.
Many retailers are doing quite well, and their stocks reflect that positive outlook. The retailers that are doing poorly either have too much debt, or long-term structural problems. Below is a long list of names that quite frankly are not really even in my top 100 ideas. I need to see more “pain” before I go back to these retail stocks.
However, my search was not in vain, because I did find one “specialty” retailer that I think is a top 30 idea.
Etsy - ETSY - $65 - is a unique internet retailer that sells $12 billion dollars of handcrafted goods to 90 million buyers. The suppliers are 9 million artists and craftsmen (crafts-people?) around the world. Maybe it is art, maybe it is just junk. Somehow ETSY makes $500 million being the middleman.
You can understand the business in 30 minutes by listening to this “fireside chat”:
https://seekingalpha.com/article/4694860-etsy-inc-etsy-52nd-annual-j-p-morgan-global-technology-media-and-communications-conference
There is also a transcript on Seeking Alpha on May 21, 2024. It is an interview with ETSY’s CEO Josh Silverman by a JP Morgan analyst.
Silverman came to ETSY in 2017 from American Express. At that point ETSY’s Gross Merchandise Sold (GMV) was just $2 billion. Obviously the pandemic made this business explode, and the stock went to almost $300/share. The question is, what is the business worth today?
Silverman say there are still many doubters. Wall Street has 14 buys, but 19 sell/holds. The balance sheet is clean. The stock only sells for 13x the 2024 estimate, and Silverman has several interesting growth ideas. The biggest growth plan is to make gifting easier. If ever there was a business that can use AI it is ETSY. As Silverman says “it is quite a computer programing task to help the buyer choose from the 100,000,000 products that are being offered.”
Small artists need a place to sell there stuff. ETSY’s online market is better than sitting all day at an art show. My neighbor went to weekend art shows for decades, and I learned it was a brutal business.
Maybe I have become a crazy person in my old age. I have waited 20 years to recommend my first internet stock. I spent a week looking at E-Bay - EBAY - a few years ago, but was never convinced that auctions did not have a significant element of fraud. ETSY is just 9 million small artists trying to make a few extra bucks.
Amazon, Wayfair, Temu, and Alibaba, sell mass produced items at cheap prices. This is not ETSY’s business. Silverman convinced me ETSY can be a growth stock again. He is out to prove the doubters wrong.
Earlier this year well known activist Elliot Management announced they have bought 13% of ETSY. Elliot’s portfolio manager Marc Steinberg was appointed to the ETSY board. Steinberg presented his ETSY idea at the famous Sohn Conference in April.
Let’s watch the quarter and see what happens.
Below is my list of retailers I have little interest in:
Dillards - DDS - $425 - Should a value investor buy this stock? Is is only 12x, and has kicked the butts of all its competitors. The problem is the stocks is up over 400% in 5 years. Some value guys will “chase” this kind of stock, I will not. DDS is very well run. I love to shop at DDS, but that does not make me want to own the stock, even at 12x. Remember buy low, sell high.
American Eagle Outfitters - AEO - $21 - This stock has gone from about $10 to $20 five times in the last ten years. I just will not chase it now, near its highs. AEO is a case study. Retailers will get cheap, if you wait long enough. The business is simple, and the balance sheet is clean. I am very angry I missed it last Spring at $11
Kohl’s - KSS - $22 - 9% yield - tried to go higher end with cosmetics and failed, wait for the dividend cut.
Foot Locker - FL - $26 - just not buying the turnaround, tried to make sneakers into collectibles, new management could be too aggressive, Pass
Victoria Secret - VSCO - $19 - too much of a cultural battleground stock, for a company with too much debt. Possible home run, or a bankruptcy. Pass
Guess - GES - $24 - 5% yield - tough fashion call on jeans, still has the feel of being family run, Pass
Buckle - BKE - $40 - too late to buy now, a model for what a conservative balance sheet can do, another case study.
Dollar Tree - DLTR - $105 - they are beginning to take the rights steps, but interest coverage is under 2x. What if there no buyer for Family Dollar?
Dollar General - DG - $127 - they made $10/share three years in a row, not convinced with the founder coming back they will close stores aggressively. Unique rural footprint is interesting, but some of the stores are really junky. Will be a buyer at $80
PriceSmart - PSMT - $89 - A unique company that is becoming the the Costco of Latin America. Too expensive now, but interesting. Follow
Macy’s - M - $17, Nordstrom’s - JWN - $24 - both are now merger arbitrage ideas, Pass
Costco, Wal-Mart, Target, Ross Stores, TJX, The Gap, Burlington Stores - they have all done well, each is way too expensive
Duluth Holdings - DLTH - $4 - A unique brand, that just might survive. Market cap under $200 million, more work needed
Designer Brands - DBI - $7 - too much leverage