We’re adding Nordstrom to our Best Idea Short list in the wake of today’s massive squeeze on what we think is a Hail Mary guide by the JWN management team. We think that by the time management misses its guide 6-12 months out, this name is in the mid-high teens, or 40-50% below today’s rip. The quarter was better than the ‘bad credit card data’ whisper…as JWN put up 23% sales growth (1% below two years ago), and came in ahead on EPS. But the big surprise was the $3-$3.50 guide for FY23 (Jan), which is nearly 50% better than where the consensus was before the print. We went through our model in detail, and quite frankly struggle to get to over $2 per share in earnings – nevermind $3.50. This is going to be a painful ‘mean reversion year’ in apparel spending – in both units per capita and average price per garment (via return of markdowns) – both of which should pressure almost every apparel retailer, especially department stores like Nordstrom. And let’s face it, the past 18-months have marked the most favorable sales and margin environment for apparel since the outsourcing and offshoring wave exploded in the 1970s – and the Nordstrom management team STILL managed to egregiously underperform virtually the entire industry. Now the company expects us to believe that it will accelerate to the upside in spectacular fashion when the rate of change in the retail environment gets downright nasty? We’re not buying it. When all is said and done, we’re looking at a ~$15bn department store retailer that’s shrinking its sales by 2-3% in perpetuity, incrementally shifting to margin-dilutive e-commerce sales, and is facing severe wage pressure on the SG&A line. All that nets out to about a 2-4% EBIT margin vs the 5.6-6% management guided to. Also, did we mention that last year 79% of EBIT was from the company’s credit card? And yes, consumer credit quality is peaking. We’re not looking for that income stream to evaporate, but it’s highly likely to head lower over a TAIL duration– which is by far the highest margin business that JWN touches. In the end, this company should get about a 3-4x EBITDA multiple, or 6-8x EPS – which suggests about $16-$18 over 12-months on $2.50 in EPS (our best case) and then a sub $10 stock over a TAIL duration on $1.50 in earnings (100% of which is credit). Before that point, will we have to question at what price this name goes private? Probably. The family tried more than once, and they’ll likely try it again when their equity value dries up. But not a concern for us with this name pushing $30. This is definitely a short squeeze to fade…
Takeaway: 40% downside in 6-12 months as it misses its Hail Mary guide, and a sub-$10 stock over a TAIL duration as the ice cube melts.
