M

Publicly traded companies mentioned herein: JC Penney Company Inc (JCP), Kohl’s Corporation (KSS), Macy’s Inc (M), Nordstrom Inc (JWN)

Highlights

While the presenter made it clear that he “does not love” the department store business model, and “all of the players in the space face longer-term challenges”, he is long shares of both Macy’s (M) and Kohl's Corporation (KSS) and sees a favorable risk/ reward setup at ~$36 and $43, respectively. This positioning was characterized as a “simple second derivative inflection trade” with a combination of cheap valuation and attractive dividend yields (4.2% for M and 4.7% for KSS) limiting downside risk. The situation is reminiscent of 2014: “At this point, we all know the third quarter hasn’t been great for department stores but it is not a disaster; full year numbers don’t carry much risk and last weekend was the first seasonal weekend we’ve had across the country”. If this winter is cold, or colder than expected, it will help drive bundled purchases. Additionally, inventories are “clean”, both companies generate double digit (%) FCF yields, and shares are trading at ~9x - 10x normalized EPS forecasts. Assuming P/E multiples expand to 12x - 13x - as has happened in the past during the Holiday season - both stocks could re-rate ~30% over the next 6-9 months.