Costco (COST): Removing from Best Ideas Long List. Several factors here for the move… 1) First off, COST hates Macro Quad 2 (see chart below) – and we’ve got plenty of that ahead of us heading into 2021. 2) Earnings growth expectations as recently as a month ago were sitting at 2-3% for FY21 (Aug) – compared to our estimate of 10-12%. Today earnings growth expectations stand at 6%. We still think there’s upside from the consensus, but the Street is clearly catching up. 3) Though this is the factor I care about the least, the reality is that monthly comp expectations have risen to the low-teens, which is close to what the company is delivering. As we see consumer shopping trip consolidation behavior continue, COST should continue to deliver outsized comps – but the consensus is almost there. All said, the upside potential vs expectations is lower, the stock is sitting near a peak 37x earnings and 21x EBITDA multiple, and we’re solidly in a Macro environment that doesn’t favor COST multiple expansion. Moving to our Long Bias List – still marginally positive given our view that Aug21 FY EPS will still march higher, and there’s upside to the TAIL model driven by Int’l and e-commerce. We’ll revisit when there’s more controversy around the name and a wider gap around economic reality vs consensus.
Nordstrom (JWN): Moving higher up our Long Bias list. The reality is that we’ve gone deeper on the model, and are getting to recovery earnings massively ahead of where the consensus currently sits, as we see a snap back in high-end apparel spending at new peak Gross Margins on top of a permanently reduced cost structure. The consensus is modeling just $1.72 per share in recovery EPS, vs $3.18ps in FY19. But given the higher incremental margins on the marginal sale upon reopening, we’re getting to $5.20 in earnings – nearly triple the consensus. JWN is a popular short in the HF community, and I understand why. This is a business that’s in a secular decline. But unlike Macy’s or Kohl’s, Nordstrom is a survivor. Today we’re looking at 44% of the float being held short – historical peak -- even after it beat the latest quarter by a wide margin. People love to hate this stock. But even if we put an 9-10x multiple on what will likely be a peak earnings year, we get to a $45-$50 stock. Still plenty of upside vs the $31 we’re looking at today. The only thing holding us back from making this a Best Idea is time…in that we’re still looking at an abysmal holiday and a questionable 2021. But we definitely like this idea a lot more today as we go deeper on the model.
