Retail Comeback

Good morning investors,

Retail and mall stocks surged yesterday after investors listened in to the highly anticipated ICR retail conference yesterday. Almost every retailer at the conference reiterated the same thing: demand is strong, Omicron has a minimal impact and inflation is not slowing down sales.

There were a lot of key companies that provided updated guidance on Q4 sales which also helped the sector including American Eagle (AEO) and Abercrombie & Fitch (ANF). Abercrombie & Fitch specifically stated that there was so much demand into Q4 that they did not have enough inventory to meet it. Other executives pointed to significantly strong pricing trends with very little promotional activity. High pricing and low promotions leads to strong merchandise margins and free cash flow.

I am heavily weighted towards to retail sector in particular heading into 2022. It is my single largest sector exposure with over 20% of my portfolio tied up into two different retailers. If the United States doesn’t shut down again from some random COVID variant, the sector seems like a no brainer slam dunk. Even the bigger more dominant players in the space seem like buys at this point.

EagleFangCapital @CapitalFang

Let's go larger cap - $KSS 1. 1162 stores - own 409 outright, own bldg w ground lease on 237, and lease the remaning 516. 82.2m of selling sf=71K sf per store. So own 45m sf 2. Own over 9.3m sf of distribution/e-comm fulfillment centers 3. Own corp HQ

I continue to hold my favorite retail names and stay constructive on the sector. In a month or so we will start getting quarterly data on specific companies along with guidance for 2022. Should my thesis hold, I think we see significant upside with limited downside.

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• Abercrombie & Fitch rallies after strong guidance update: A&F expects FY21 sales to be up in the range of 19% to 20% compared to 2020 and up 2% to 3% compared to 2019. Operating margin of 9% to 10% is also anticipated, in-line with a prior outlook. CEO update: "Strong response to our winter and holiday collections, including standout performance in jeans, dresses and sweaters, enabled us to maintain our planned promotional cadence, including reducing the depth of our promotions over the peak Black Friday/Cyber Monday period and throughout December... Looking ahead, we expect to minimize the gross margin impact of late deliveries by balancing promotional depth and utilizing pack-and-hold where appropriate." Read more.

• American Eagle Outfitters is higher after guidance tops expectations: American Eagle Outfitters is higher after issuing a strong update on holiday sales, including that it is on track to achieve $600M in operating income for fiscal 2021. The retailer is due to present later today at the ICR Conference. For FY23, AEO targets revenue of approximately $5.8B vs. $5.4B consensus and operating income of $800B, with the operating margin expanding to 13.5%. Read More.

• Oil's relentless march higher - WTI tops $80, energy equities follow: West Texas oil prices are higher by ~$3 this afternoon on light supply news, indicating refineries and speculators are bidding up the price of the commodity as Omicron-linked demand concerns wane. WTI is now up ~8% ytd, the US producers are up ~13%, and large Canadian producers like Cenovus and MEG are up 16%; the S&P 500 is down slightly YTD. Read More.

• Nancy Pelosi Loads Up On Tech Stocks: The greatest investor in the world, Nancy Pelosi, recently filed a disclosure form showing that she purchased a handful of tech stocks worth millions. These stocks include Alphabet Class A Inc. (GOOGL), The Walt Disney Co. (DIS), Roblox Corp. (RBLX), salesforce.com (CRM) and Micro Technology (MU). The purchases occurred right before Christmas and just days after Pelosi had a press conference in which she urged that members of congress should be allowed to actively trade stocks because of a “free market”. Read More.

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