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COST - 2yr SSS Set-Up Appears Favorable For January 2021.

Jan. 14, 2021 8:16 AM ETCostco Wholesale Corporation (COST)
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  • 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
January A 2020 5.6% 12.9%
February A 2020 11.6% 17.3%
March A 2020 12.1% 17.6%
April A 2020 0.0% 5.6%
May A 2020 9.2% 13.6%
June A 2020 13.6% 18.9%
July A 2020 15.7% 21.0%
August A 2021 14.3% 20.2%
September A 2021 16.7% 22.4%
October A 2021 16.4% 23.2%
November A 2021 14.2% 18.5%
December A 2021 11.0% 19.4%

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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