Adding JWN To Long Bias List

We’re adding Nordstrom (JWN) to our LONG Bias List. Yes, we’re adding a department store that every Hedge Fund on the planet is telling me is having a horrendous quarter onto our Long Bias list just a week ahead of the print. Usually not how we roll. With short interest as a % of the float at 45% -- a staggeringly high number (historical peak) for a company that is actually a survivor in the apparel retailing space – which tells me that a miss is well embedded in expectations. But in going through the KSS numbers/model earlier today, there’s one risk we see on being short next year, and that is that we have an environment for pent-up apparel spending as people return to work, going out, and generally caring about how they look after a year of skipped spending on apparel. In Kohl’s case, they’re taking their assortment directly to what works in mid-pandemic (Athletic, Home and Wellness) – not in a recovery. That’s bad news, and another reason why the KSS short makes so much sense to us as numbers are highly likely to disappoint. Nordstrom is poorly positioned for pandemic spending, but its upper-scale/upper-income customer is supremely positioned for an apparel recovery as the consumer is comfortable enough to return to the mall – even if at traffic levels below 2019. Keep in mind that this is a company that earned $3.18 per share last year, which in itself was mediocre at best. It also had recovery earnings of $2-$3 per share in the wake of the Great Recession better than a decade ago.  There’s no reason why we can’t see $2.50-$3 in EPS power as comps rebound in FY21 on top of cost cuts taking place in FY20 providing outsized operating leverage, and that’s with the consensus at $1.52. Also, when compared to KSS and Macy’s, JWN has less credit income exposure and via a portfolio of higher quality consumers. If we’re wrong/early on this quarter and the stock sells off on weakness, then we’ll take it higher on our Bias List. But the recovery setup looks net bullish to us with 50% upside as we head into 2021.