August 26, 2022

This note includes our review of earnings from Macy’s (M). Next week, Duluth Holdings (DLTH) reports earnings.

Today, we are moving shares of Lamb Weston Holdings (LW) from Buy to Sell. We think highly of this company and are reluctant to part ways. However, the shares have essentially reached our $85 price target. Its recovery from the pandemic, as well as the intervening potato crop shortage, has been impressive. However, we see the risk-return trade-off as fair at this point. Also, our Recommended List now includes nearly 40 stocks, so we would like to narrow our focus to those stocks with much more attractive turnaround potential.

The Lamb Weston Holdings position generated an approximate 36% total return since our initial recommendation at $61.36 in the May 2020 edition.

This coming Wednesday, we’re publishing the September edition of the Cabot Turnaround Letter. We’ll discuss attractive several stocks with low share prices, several additional names that we discovered while trolling through the recent batch of quarterly 13F regulatory filings, and our feature recommendation.

Earnings Updates

Macy’s (M) – With a capable new CEO since February 2018, Macy’s is aggressively overhauling its store base, cost structure and e-commerce strategy to adapt to the secular shift away from mall-based stores. Its sizeable debt is not crippling the company but remains an overhang. Macy’s was hit hard by the pandemic, setting back its turnaround from a financial perspective, but the company’s acceleration of its overhaul shows considerable promise.

Macy’s reported reasonable second-quarter results given its inventory glut. Adjusted earnings of $1.00/share fell 22% from a year ago but were about 14% above the consensus estimate. Revenues of $5.6 billion were about 2% above estimates. Comparable store sales fell 1.6%. The company reduced its full-year revenue guidance fractionally but reduced its adjusted EBITDA guidance by about 9% due to a weakening consumer outlook and the high inventory levels across the industry.

Overall, revenues appear stable and better than two years ago. On a comparable store basis, sales rose 4.4% against the second quarter of 2019, showing some incremental benefits from better merchandising, the growth of digital sales which are counted in the comp base, and some closing of low-productivity stores.

The inventory glut seems to be a mistake (common across most of the industry) that will cost Macy’s perhaps six months of financial progress, but probably not more. The gross margin dipped to 38.9% from 40.6% a year ago as the company slashed prices to offload its inventory, but we believe it could have been much worse. Inventory turnover was on par with last year and 15% better than the normal 2019 pace, suggesting little in the way of vast racks of “must go at any price” merchandise. Macy’s seems to be bifurcating its inventory: overbought goods that are being sold off, and a normal inventory buying pattern in anticipation of the upcoming holiday season. This sensible approach should help contain the mistake rather than having it set off a cycle that lasts for several quarters or longer. It is also an approach that Macy’s may not have had the leadership or balance sheet to undertake in prior cycles.

And, the balance sheet is feeling the weight, as inventories remain elevated and cash on hand is low at $300 million as the company appears to have paid its suppliers promptly. Net debt remains unchanged from a year ago, dragging on its efforts to keep trimming its borrowing.

Credit card revenues ticked up from a year ago, encouraging in that they didn’t decline.

All-in, the company performed admirably, setting aside its blunder in which nearly everyone in the industry participated.

Friday, August 26, 2022, Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 7 minutes and covers:

• Ratings change:
  
  • Moving Lamb Weston Holdings (LW) from Buy to Sell

• Earnings report from Macy’s (M)

• Comments on other recommended companies:
  
  • It’s been a quiet week, but we expect more updates and news in September, partly as the investor conference season reopens.

• Elsewhere in the markets:
  
  • The Jackson Hole Economic Symposium.
  • Market irony: LastPass is hacked.

• Final note

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

Market Cap	Recommendation	Symbol	Rec. Issue	Price at Rec.	8/25/22	Current Yield	Current Status
Small cap	Gannett Company	GCI	Aug 2017	9.22	2.21	-	Buy (9)
Small cap	Duluth Holdings	DLTH	Feb 2020	8.68	9.58	-	Buy (20)
Small cap	Dril-Quip	DRQ	May 2021	28.28	25.21	-	Buy (44)
Small cap	ZimVie	ZIMV	Apr 2022	23.00	16.98	-	Buy (32)
Mid cap	Mattel	MAT	May 2015	28.43	23.73	-	Buy (38)
Mid cap	Conduent	CNDT	Feb 2017	14.96	4.36	-	Buy (9)
Mid cap	Adient plc	ADNT	Oct 2018	39.77	35.18	-	Buy (55)
Mid cap	Lamb Weston Holdings	LW	May 2020	61.36	82.58	1.2%	SELL
Mid cap	Xerox Holdings	XRX	Dec 2020	21.91	18.02	5.7%	Buy (33)
Mid cap	Ironwood Pharmaceuticals	IRWD	Jan 2021	12.02	11.48	-	Buy (19)
Mid cap	Viatris	VTRS	Feb 2021	17.43	10.17	5.0%	Buy (26)
Mid cap	Organon & Co.	OGN	Jul 2021	30.19	30.34	3.5%	Buy (46)
Mid cap	TreeHouse Foods	THS	Oct 2021	39.43	47.91	-	Buy (60)
Mid cap	Kaman Corporation	KAMN	Nov 2021	37.41	34.60	2.6%	Buy (57)
Mid cap	The Western Union Co.	WU	Dec 2021	16.40	15.66	5.8%	Buy (25)
Mid cap	Brookfield Re	BAMR	Jan 2022	61.32	51.61	1.1%	Buy (93)
Mid cap	Polaris	PII	Feb 2022	105.78	121.86	-	Buy (160)
Mid cap	Goodyear Tire & Rubber	GT	Mar 2022	16.01	15.16	-	Buy (24.50)
Mid cap	M/I Homes	MHO	May 2022	44.28	46.25	-	Buy (67)
Mid cap	Janus Henderson Group	JHG	Jun 2022	27.17	25.25	6.3%	Buy (67)
Mid cap	ESAB Corp	ESAB	Jul 2022	45.64	44.64	-	Buy (68)
Large cap	General Electric	GE	Jul 2007	304.96	78.14	0.4%	Buy (160)
Large cap	Shell plc	SHEL	Jan 2015	69.95	54.74	3.9%	Buy (60)
Large cap	Nokia Corporation	NOK	Mar 2015	8.02	5.07	1.7%	Buy (12)
Large cap	Macy’s	M	Jul 2016	33.61	19.06	3.6%	HOLD
Large cap	Toshiba Corporation	TOSYY	Nov 2017	14.49	19.14	3.2%	Buy (28)
Large cap	Holcim Ltd.	HCMLY	Apr 2018	10.92	9.11	4.7%	Buy (16)
Large cap	Newell Brands	NWL	Jun 2018	24.78	20.32	4.7%	Buy (39)
Large cap	Vodafone Group plc	VOD	Dec 2018	21.24	13.84	7.1%	Buy (32)
Large cap	Kraft Heinz	KHC	Jun 2019	28.68	38.61	4.3%	Buy (45)
Large cap	Molson Coors	TAP	Jul 2019	54.96	55.67	2.9%	Buy (69)
Large cap	Berkshire Hathaway	BRK.B	Apr 2020	183.18	298.13	-	HOLD
Large cap	Wells Fargo & Company	WFC	Jun 2020	27.22	45.39	2.8%	Buy (64)
Large cap	Western Digital Corporation	WDC	Oct 2020	38.47	47.91	-	Buy (78)
Large cap	Elanco Animal Health	ELAN	Apr 2021	27.85	16.23	-	Buy (44)
Large cap	Walgreens Boots Alliance	WBA	Aug 2021	46.53	36.80	4.9%	Buy (70)
Large cap	Volkswagen AG	VWAGY	Aug 2022	19.76	18.56	3.8%	Buy (70)

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.