Stanford Wyatt on Nordstrom (JWN) and Tile Shop (TTSH)

Episode Summary

Executive Summary: The episode features Andrew Walker interviewing Stanford Wyatt about his investment framework, his newsletter Rational Research, and two contrarian retail ideas: Nordstrom and Tile Shop. Wyatt emphasizes deep fundamental research, management quality, and balance-sheet resilience, arguing both names are mispriced due to COVID-driven pessimism despite improving operations, cost cuts, and potential upside from normalization.

Main Topics: Rational Research and investment process (Priority: 5/5): Wyatt explains Rational Research as a weekly, free newsletter that uses micro company data to infer macro trends and clarify his own thinking while also gathering feedback from other investors. August Partners and concentrated value investing (Priority: 5/5): He describes August Partners as a concentrated long/short partnership focused on mispriced public equities, with attention to fundamentals, insider behavior, and favorable risk-reward setups. Nordstrom as a post-COVID retail recovery idea (Priority: 5/5): A deep dive on Nordstrom covers why the department store may survive and re-rate: strong brand, loyal customer base, high insider ownership, class A mall footprint, digital progress, and major cost cuts. Department store and physical retail debate (Priority: 4/5): The conversation tests whether physical retail is dead and whether Nordstrom differs from failed department stores like Sears, JCPenney, Lord & Taylor, and Neiman Marcus. Nordstrom Rack, digital channels, and synergy (Priority: 4/5): Wyatt discusses Rack as a third of sales and potentially underappreciated, with omni-channel benefits, inventory synergies, and possible upside from off-price online expansion. Tile Shop and microcap turnaround potential (Priority: 4/5): Wyatt outlines Tile Shop as a distressed but potentially valuable microcap retailer benefiting from housing strength, insider alignment, B. Riley ownership, and a cleaner legal/corporate setup after a lawsuit settlement. Management incentives and capital allocation (Priority: 4/5): A recurring theme is management alignment: Nordstrom’s family ownership, attempted take-privates, compensation tied to EBIT/ROIC, and how incentives may affect outcomes for minority shareholders.

Key Arguments: Rational Research helps Wyatt identify facts and themes across industries, not just earnings beats/misses, and improves his investment process. August Partners is focused on concentrated, fundamental mispriced equities rather than rigid growth-vs-value labels. Nordstrom is not priced as a survivor; if it normalizes anywhere near 2019 levels, the stock could offer substantial upside. Nordstrom’s family control is a double-edged sword: it supports long-term alignment but could also reflect self-interested actions. Physical retail is not dead; experiential shopping, returns, and click-and-brick synergies still matter, especially in apparel and high-touch retail. Nordstrom Rack is strategically important because it adds off-price growth, inventory liquidation flexibility, and omni-channel utility. Cost cuts and reduced capex could allow Nordstrom to earn supernormal profits if demand stabilizes and competitors continue closing stores. Tile Shop’s worst-quarter stress test still produced positive EBITDA and free cash flow, supporting the turnaround thesis. B. Riley’s stake in Tile Shop is a meaningful signal because it may bring strategic insight, financing support, or a future transaction path. Management behavior, insider ownership, and capital allocation are central to predicting outcomes in both names.

Data Points: Rational Research frequency: weekly - Wyatt’s newsletter cadence, described as a weekly micro-macro piece. August Partners position count: 10 to 15 long positions - Wyatt describes the fund as concentrated with a small number of longs. Nordstrom family ownership: about one-third of shares - Used to argue management and family are economically aligned with shareholders. Nordstrom full-line stores: about 100 stores - Wyatt notes Nordstrom has closed 16 full-line stores and still has roughly 100 class A mall locations. Nordstrom Rack stores: about 250 locations - Highlights the smaller footprint versus TJ Maxx and Ross. Nordstrom digital revenue mix: 60% in the second quarter - Digital became the majority of sales during the pandemic quarter. Nordstrom digital revenue growth: 7% - Wyatt cites prior-year digital growth as lagging Amazon’s growth. Amazon North America growth: 21% - Used as a proxy to show Nordstrom may be losing share online. Nordstrom cash on balance sheet: about $1 billion - Supports the argument that the company can survive. Nordstrom EBITDA 2019: $1.4 billion - Used as a normalized benchmark for valuation. Nordstrom EBITDA expectation 2021: just over $1 billion - Shows a depressed but improving earnings base. Nordstrom operating cash flow: over $1 billion for 11 consecutive years; $1.2 billion last year - Shows durability of cash generation. Nordstrom capex: about $450 million go-forward; down 30% this year - Peak capex has rolled off after the New York store project. Nordstrom cost cuts: $500 million total - Management cut $200-$250 million plus another $250 million in cash costs. Nordstrom low historical EBITDA multiple: 4.5x to 5x - Wyatt says the stock has historically traded around this multiple. Nordstrom equity price: about $13 per share - Referenced during valuation discussion. Nordstrom enterprise value: approaching $5 billion - Used to frame current valuation versus normalized EBITDA. Nordstrom 2020 guidance before COVID impact: $325 million to $350 million EPS; $750 million free cash flow after capex - March 3 guidance cited as a normalized operating benchmark. Nordstrom loyalty members: 13 million - Signals customer base strength and retention. Nordstrom Anniversary Sale capex tie-in: peak capex last year - The New York store and other investments are now rolling off. Nordstrom Rack share of sales: one-third of sales - Shows Rack’s importance within the overall business. Tile Shop founding year: 1985 - Background on the company’s origin. Tile Shop IPO year: 2012 - The company went public as a retail concept story. Tile Shop second-quarter sales change: down 25% - Worst-quarter stress test during COVID. Tile Shop second-quarter EBITDA: $8 million - Despite revenue decline, it remained profitable. Tile Shop second-quarter free cash flow: $17 million - Demonstrates cash generation even in downturn. Tile Shop store count: 140 stores - Used to describe scale and distribution. Tile Shop board/insider ownership: 30% between two board members; 10% founder; 8% B. Riley - Highlights strong insider and strategic ownership. B. Riley ownership in Tile Shop: 8% - Recent stake that sparked further research. Tile Shop shareholder lawsuit restriction: 3 years - Court outcome prevented certain insiders from buying stock in the open market. Tile Shop delisting timing: October 2019 - Management and board proactively delisted, leading to a stock collapse. Buckle September same-store sales: up 23% - Used as evidence that mall-based physical retail can still be strong.

Pivotal Quotes: "once a week, you put out what I call a micro-macro piece where it's looking at something macro economics from how one or two kinds of micro firms are talking about it" — Andrew Walker: Andrew introducing and praising the Rational Research format. "I care a lot about who the people are that are involved and kind of what their behaviors are" — Stanford Wyatt: Wyatt explaining why management behavior is central to his investing process. "the stock is really cheap" — Stanford Wyatt: Repeated conclusion on Nordstrom valuation if normal earnings and cash flow recover.

Implications: Listeners get a framework for spotting distressed retail opportunities: focus on management, cash flow, balance sheet, and post-COVID normalization rather than headline pessimism. If execution holds, Nordstrom and Tile Shop could rerate materially.