JWN | Written in the Cosmos

I’ll be the first to admit, this JWN quarter was simply ‘good’ as opposed to the ‘exceptional’ numbers we saw by the rest of the department store group and other apparel retailers this quarter. Sales virtually doubled from last year (when they were down 52%), Gross Margins were on par with 2019, and EPS came in at $0.49. Yes, JWN nearly doubled the consensus at $0.27, but the company earned $0.91 in 2Q19. With the stock up 13% in the week heading into the print, it probably deserves to be down after hours. But what really gets me is management’s guidance. The company absolutely sandbagged the rest of the year. I swear it must be written in the cosmos that this management team will do everything in its power to describe the cup as half empty whenever the team opens their mouths. Can someone explain to me how it took up revenue guidance to ‘+35% or better’ for the year, AND has $400mm in cost cuts this year ($300mm of which are permanent and account for 280bps in margin lift) yet it only guided to a 3.5% EBIT margin for the year? It’s ridiculous. We’re hardly being aggressive in our model, and are coming in at 42% sales growth (on top of -31% last year), and are getting to 6.7% EBIT margins, or $3.46 per share. That compares to the ~$2ps where the consensus is likely to come out. Our NTM EPS estimate is $5.50, which is double the consensus. Granted, that’s an operational level that the company is likely to sustain for the next three years as opposed to grow, but then you gotta reinstate the dividend, and you still have room for $600mm-$800mm in cash each year to repo stock – which is the one message that management didn’t botch on its call. That gets us to TAIL EPS of $6-$7 per share. Let’s call it $6.50 in 3-years. I’d never argue more than a 10x P/E for this stock…yes, it’s the lone department store that’s actually a survivor, but I gotta cap the multiple with a ‘management is horrible’ discount. Either way, I think we’re looking at a $50 stock in a year (9-10x $5.50). A frustrating print, but I think that the earnings upside here is better than its peers – even though management failed to instill any confidence whatsoever in the investment community. That’s good for a 40%+ return over the course of a year. This will never be a Best Idea for us…which is probably stating the obvious. But I think the stock should be bought on this after-hours selloff.