- While we tend to get lost in the probabilities and statistics of options trades or the search for the highest coefficient of variation, we must always identify the fundamental set-up.
- Institutional investors love the 2-yr stacks on SSS or gross margin or some other financial metric that takes into consideration the "lap" a company faces.
- COST 2-yr U.S. SSS accelerated into the low 20% during the peak of Covid buying during the summer months and early Fall 2020.
- November 2020 2-yr rate clearly decelerated vs. recent trend with December 2020 2-yr re-accelerating slightly.
- With January 2021 being an easier SSS lap, the 2-yr rate implies a nice acceleration in January 2021 vs. December 2020.
COST U.S. SSS Ex. Fuel
One point we must make is that 2-yr stacks are obviously not a crystal ball (if they were I would not be writing this post). We simply use 2-yr or 3-yr or 4-yr stacks to better analyze current fundamental operating strength.
If we use the average 2-yr stack (19%) over the last 11 months (we will exclude April 2020 given store closures), January 2021 SSS would be 13.4%.
Given the favorable commentary we have heard from other retailers reporting Holiday SSS and speaking about January, we have to assume the general environment for retail has improved in January vs. December (Holiday shopping appeared to be very choppy).
We believe a January comp sub 12% (yes, strong) would be shoulder shrugging result in the eyes of institutional investors, above 14.0% and I believe the stock would set-up nice even into harder laps in February.
Remember, keep an eye on if the 2-yr rate accelerates or decelerates in January 2021 in forming initial SSS expectations for February 2021!
|Period||Year||U.S. - SSS||U.S. 2-Yr|
Analyst's Disclosure: I am/we are long COST.
Disclaimer - This is not investment advice. We have a number of puts sold on COST over the next 2-3 months at varying strike prices.
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