On one hand, the HF consensus ‘JWN is blowing up’ call was right…the company missed on revenue – one of the few retailers that did so this EPS season, albeit by a measly 0.1%. So everyone who has credit card data got the fundamental line item right. Revenue missed – by a lousy 0.1%. Rounding error. But unfortunately credit card data doesn’t track gross margin, sg&a and inventories, all of which came better than consensus in a quarter where even I resided to the ‘fact’ that JWN would cough up a lung. But it hardly coughed, nevermind coughed up a vital organ. Merchandise inventories were down 27% in the quarter, nearly double the -16% sales decline. Gross margin beat by a full 100bps, despite the fact that digital sales (which are GM-dilutive) came in 54% of total revenues. Any way you cut it this management team managed its business model about as well as one could possibly expect from a company like JWN. The bears, simply put, were wrong, for the wrong reasons. 4Q 'guidance' was hardly inspiring, but we're far from being out of the woods as it relates to covid traffic pressure. Prudent from where I sit. But from here it's a function of which quarter the rebound actually begins to take hold -- not if, but when. That's a multiple supporter -- especially in how well the company is managing inventory in the interim.
We added Nordstrom (JWN) to our LONG Bias List last week, as we think JWN is setting itself up to be one of the best plays on a snap-back and closet-restocking of the higher-end apparel market in 2021 and 2022. By no means were the sales results in 3Q worth a even a ‘golf clap’ but 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 (that stock has been en fuego), 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 $4-$5 in EPS power as comps rebound by FY22 on top of cost cuts taking place in FY20 providing outsized operating leverage, and that’s with the consensus < $2.00. In other words, this stock could double/triple from here. Also, when compared to KSS and Macy’s, JWN has less credit income exposure and via a portfolio of higher quality consumers.
Long JWN and Short KSS – that’s your department store money-maker TAIL call as we see it today. JWN is inching itself closer to our Best Idea designation – something we take very seriously.
