We’re adding Costco to our Long Bias list on our Position Monitor. Our restaurant team, led by Howard Penney, has been clear about the spending on food at home reversing years of share loss to restaurants – a trend that will likely extend far beyond a single quarter of pantry stocking. With approximately 54% of COST’s sales coming from food this creates a significant tailwind that does not appear to be represented in consensus estimates. Is COST cheap? Not at all. It’s trading at 33x earnings, 18x cash flow and less than 2% of the float is held short. But the Street is only looking for 7% EPS growth in an environment that clearly favors COST at the core. We’ll take the over on COST coming in at a double digit rate this year (ending Aug) and next. The company just put up an impressive 9.6% comp and the stock trading lower bc it was shy of the '20% whisper'. I'll take that kind of comp any day of the week.
We're also adding Chewy to our Long Bias list. We’ve been positively predisposed to the name since the June IPO, but the current environment is about as good as it can get for CHWY. People won’t stop feeding their pets, but are extremely averse to trudging out the pet store to buy food and supplies. Enter Chewy. It sells a better basket of brands than Amazon, and service is arguably better. Unlike Wayfair, which needs to reacquire each new sale, nearly 70% of CHWY sales come from its auto-ship program, giving it a highly recurring revenue stream. The company is not profitable, which is our primary hang-up right now, but there’s growth optionality as the company becomes a ‘pet portal’ and offers products and services like grooming, insurance, and pet meds – which could land the company in the black over a TAIL duration. This is one of the poster children for a company that will emerge from this crisis stronger than it went in.
Adding Wayfair back to Short Bias list. We removed Wayfair from our short list around $50 in early March, and when it kept going lower we were gearing up to potentially add to the long side of the ledger. If nothing else at those low prices it could be an acquisition target for large ‘ecom lacking’ retailers, given Wayfair has great ecommerce capabilities and talent. But after its preannouncement and convert, the stock has rallied back to near-$80, where we think it’s a short again. The market is getting excited over improved sales trends with people stuck at home and competitor doors closed. We think this accelerated demand is a pull forward, and will not be sustainable for multiple quarters/years. This company still loses a lot of money, the Europe business still needs to be shut down, and ecommerce competitors are still coming after Wayfair (AMZN arguably has its eye off the ball with this category while it focuses on essentials, but it will be back in the coming quarters). On our short call in March 2019 (with the stock near $170) we said W would run out of cash by 2021, seems we were right since the company did another convert a couple months after layoffs to reduce costs too. So it seems W is still burning cash fast even with cost cuts and near term incremental demand.
TGT Moving Higher on Short Bias list. TGT is side stepping the battle with WMT and AMZN and is instead putting 90% of its capital into its stores instead of investing in DCs, pick and pack operations, etc. Over the short term, having store associates pack boxes with merchandise is working, but long term it’s not scalable. Another factor is the company’s ‘merchandising initiatives’ which have been driving gross margins for the past year. Basically, it has been squeezing vendors on price and terms and it’s accrued directly to the P&L. But today the vendors are hurting, and it arguably will have to release its terms to help vendors stay afloat. At a minimum it puts the biggest value creator over the past year at risk. The biggest positive is that the stores are open and the 20% of the mix that is grocery is comping up. But that’s about it. Add on the fact that it could easily take a 10%-15% earnings hit just from credit partnership revenue losses given where the unemployment picture is shaping up. TGT getting more interesting short side on upgrades and rallies.
