Moving BBWI higher on the Long Bias list. The stock sold off late last week due to commentary around weak trends post X-mas while revising the quarter to the high end of prior guidance range on both revenue and EPS. We think the selloff is overdone. Recall we are lapping stimulus checks that hit late Dec into early Jan last year, and when combined with the recent Covid spike, some near term weakness is not a surprise. BBWI is a stable grower and a company that despite tough compares can still deliver earnings growth in 2022. We’ll buy this name at 12x EPS all day. It has some leverage, but no maturities until 2025 and it generates a ton of cash with $1.5bn in cash on the balance sheet. The company can use any extended stock weakness for accelerated buyback. We like ULTA short against this as we think the model trajectories will be relatively similar while ULTA’s PE multiple is 10 turns higher.
Moving ASO down to the Long Bias List from Best Ideas. We elevated this to a Best Idea Long ahead of its 3Q print expecting a beat and a stock rally. We got that trade up on the print, though the stock has weakened since while still delivering outperformance vs our favorite sporting goods shorts in HIBB and BGFV. ASO is still crazy cheap, but now we think the trend setup is less favorable. We’re getting more bearish on sporting goods as it is a risk category in 2022 given outsized consumption over the last couple years as outlined in our Retail Themes call last week. We see some earnings revision coming, which is clearly in the market expectation. But we’d rather de risk the near term including lapping stimulus before this finds its way back onto the Best Ideas list. The gun/ammo trade could be a headwind in 2022 depending on how the political climate as well. Longer term we like ASO model with unit growth optionality, quality net migration markets, cash return potential, and relative valuation to peers.
Adding JWN to Short Bias list. This ticker screened negatively in our SIGMA analysis. Inventories are building, with margins weakening. That is a problem with management here delivering some of the weakest execution during the 2021 apparel rip and we’d expect more of the same in apparel margin reversion in 2022. Recent history suggests if there is a way to mess things up, Nordstrom management will find it. The company recently announced it is exploring a spin off of Nordstrom Rack. This is a negative sign as it looks like a headline to scare shorts into a squeeze as opposed to any real move for value creation. Keep in mind that Rack has been a continually underperforming asset. And the two banners rely on each other for clearance/inventory flow. So a separation would probably means some margin pressure. Best bull case from here is that this company goes private, though that has been the bull case that pops up every year or two and yet a deal never gets done.
Adding DG and DOL.TO to Long Bias list. Both of these names screened bullishly in our SIGMA analysis. They are best in class operators in dollar stores for the US and Canada. Both also have relatively easy compares vs much of retail. These are good names to own in the Macro Quad 1 or 4 setup we have for the US and Canada in 1H2022. Those factors combined are enough to put these on the long bias for further vetting. DLTR is still our favorite in the dollar store space by far as executing breaking the buck is a big earnings driver scaling in 2022 on top of easy comparisons. As the setup for retail in aggregate becomes more negative, these are some stocks to be Long for alpha against your shorts. The historical performance by Macro Quad for DG is below.
