Nordstrom Inc - Zacks Investment Research



|Nordstrom Inc. |(JWN-NYSE) |$50.17 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 4Q17 Earnings Update

Prev. Ed.: Nov 6, 2017; 2Q17 Earnings Update

Brokers’ Recommendations: Neutral: 64.3% (9 firms); Positive: 21.4% (3); Negative: 14.3% (2) Prev. Ed.: 5;5;3

Brokers’ Target Price: $50.23 (( $3.69 from the last edition; 13 firms) Brokers Avg. Expected Return: 0.1%

Note: We do not have access to ‘Sell’ reports

Portfolio Manager Executive Summary

Nordstrom Inc. (JWN) operates as a fashion retailer in the United States. The company sells apparel, shoes, cosmetics and accessories through Nordstrom, Nordstrom Rack as well as through its website and catalogs.

Of the 14 firms rating the stock, three were positive, nine were neutral, while two had a negative stance.

The outlook of the firms toward Nordstrom is dealt with in the following paragraphs:

Neutral or equivalent outlook (64.3%; 9/14 firms): Despite holding a favorable long-term fundamental outlook on the company, these firms remain cautious about the tough consumer environment, competitive and promotional headwinds. The firms assume that consumers have a variety of options to choose from for their spending. Therefore, it might be difficult for Nordstrom to outperform peers in the market due to the absence of its own private merchandise brand. Therefore, these firms think that it may take time for the company’s extensive investments to yield results.

Though majority of the firms are hopeful about Nordstrom’s extensive investment plans, including opening new stores in Canada, e-commerce growth and accelerated Rack expansion, some are skeptical about these investments. These firms are concerned that this may hurt Nordstrom’s margins and returns on invested capital (ROIC) in the short term.

Positive or equivalent outlook (21.4%; 3/14 firms): These firms believe that Nordstrom offers various assortments with an unmatched level of customer service in the department store industry that will help the company maintain its high sales growth rate. Further, Nordstrom's focus on price integrity and superior customer service will boost growth, resulting in market leadership, strong brand recognition and relevance, and a healthy e-commerce retail environment. The company will thus benefit from improved consumer sentiment and increased demand.

Further, the bullish firms appreciate the company’s long-term vision to provide customers with a differentiated, seamless multichannel experience. In this regard, Nordstrom remains focused on developing the multichannel network; improving its merchandise offerings; developing IT infrastructure to enhance customer’s web and mobile experience; renovating stores with a modern look; developing fulfillment centers to enable speedy delivery to online customers; implementing an enterprise-wide inventory management system as well as enhancing relationships with customers. Further, the firms remain optimistic about the company’s rollout of a card-free loyalty program.

Firms also remain impressed with Nordstrom’s constant efforts to adapt to the changing shopping trends, as evident from its robust online sales. These initiatives will go a long way to open up multiple growth avenues for the company.

May 2, 2018

Overview

Nordstrom Inc. is a leading fashion specialty retailer in the United States offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. In fact, it offers both branded and private-label merchandise, which are positioned in the upscale segment of the industry and targets the aspiring middle class.

Nordstrom has two segments: Retail and Credit Card. The Retail segment offers a selection of brand names and private-label merchandise. The segment includes Nordstrom branded full-line stores and website, off-price Nordstrom Rack stores and other retail channels, including HauteLook and Jeffrey boutiques. The Credit Card segment operates Nordstrom private-label and co-branded VISA credit cards.

The firms identified the following issues as critical to the evaluation of the investment merits of Nordstrom:

|Key Positive Arguments |Key Negative Arguments |

|Nordstrom’s continued focus on differentiating its assortments provides it |Merchandising errors and execution risks are always associated with the |

|with a competitive edge. |implementation and utilization of new systems. |

| | |

|The company has high visibility into its future opportunities, including the|Any potential weakness in the high-end consumer market and the lack of |

|opening of stores. |square footage growth could have a negative impact on the company’s |

| |earnings. |

|Nordstrom is committed toward improving its customer service. | |

| |Changing fashion trends and markdown risk remain threats to the company.|

|Improved performance of the women’s apparel section, revamping of the Savvy | |

|department and introduction of some exclusive brands are likely to boost |Nordstrom operates in a highly competitive backdrop, where the target |

|sales volume. |customers have a multitude of retail options. |

| | |

May 2, 2018

Long-Term Growth

Nordstrom’s strong line-up of globally recognized brands acts as a competitive advantage for the company, bolstering its well-established position in the market. The company offers a broad array of well-known brands, targeted toward the whole family, through a strong nationwide network.

The firms maintain that Nordstrom has developed a differentiated business model known for its emphasis on customer service and its large footwear department. It focuses on providing a quality customer experience via personalized service, a compelling merchandise offering and a pleasant shopping environment. Nordstrom also appeals to its consumers by offering a broader, more inclusive selection of quality merchandise, which further distinguishes it from other mall-based department store retailers.

Additionally, Nordstrom’s business is in line with the evolving retail industry that focuses on offering maximum choices to customers. The company also makes regular amendments to its clearance strategy to better manage its inventories, keep up with customer demands and provide them with a better shopping experience. In addition, the price integrity initiatives undertaken by the company are likely to help build healthy relations with customers, thereby enhancing customer loyalty.

Furthermore, the firms have appraised the company’s acquisition of Trunk Club, a provider of personalized clothing services for men, as this will help Nordstrom in capturing market share in the rapidly growing men’s clothing business. The firms believe that the acquisition strategically fits Nordstrom’s business model, as it will allow the company to better serve its male customers and facilitate the expansion of its online clothing services for men, its initial investment in which dates back to 2012 when it acquired Bonobos.

The firms are of the opinion that Nordstrom is poised to augment its sales, given its e-commerce enhancement endeavors, the successful expansion of Rack Stores, growth in Canada and multi-channel investments. Moreover, the firms think that Nordstrom’s focus on building customer loyalty and its initiatives to create a customer-friendly shopping environment will drive sales in the future. Additionally, the firms commend the company’s efforts to attract technology-friendly consumers by enhancing its mobile commerce sites, social networking, and in-store capabilities.

Moreover, the company’s capital expenditure plan reveals its stringent focus on improving its market share by increasing investment in stores. Going forward, management plans to continue making significant investments to support growth in Canada and New York, as well as its e-commerce business and Rack Stores.

May 2, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |21.4%( |

|Neutral |64.3%( |

|Negative |14.3%( |

|Average Target Price |$50.23( |

|Digest High |$60.00( |

|Digest Low |$40.00( |

|No. of Firms with Target Price/Total |13/14 |

Risks to the target price include deterioration in the consumer-spending environment, slowdown in comps growth, and fashion-related risks in a seasonal, cyclical and trend-focused sector.

Recent Events

On Apr 12, 2018, Nordstrom inaugurated its first-ever exclusive men's store in New York City at 235 West 57th Street. This 47,000 square feet store is a prelude to the company’s largest store project, which together with a standalone women's store are expected to become an important shopping destination.

On Mar 20, 2018, Nordstrom's board of directors (Special Committee) terminated all talks with the Nordstrom family regarding taking the company private. This is because the company could not reach an acceptable price for the transaction. Further, the special committee believes that Nordstrom's customer strategy positions it to capitalize on opportunities and gain market shares.

On Mar 13, 2018, Nordstrom revealed plans to relocate a Rack store to the latest location in the Sugar House Shopping Center, in Salt Lake City, UT. Spanning across 36,000 square feet, the relocated store is likely to open doors in spring 2019.

On Mar 8, 2018, Nordstrom announced deals to purchase two major retail technology companies — BevyUp and MessageYes — to cater to the needs of the evolving retail industry.

On Mar 5, 2018, Nordstrom’s board of directors turned down the buyout proposal from the Nordstrom family, stating that the cash bid of $50 per share was inadequate. The Special Committee scrutinized the proposal in consultation with its financial advisor as well as legal counsel and arrived at the decision in the best interest of the company and its stockholders. Also, the Committee prohibited its advisors from providing any more due diligence information to the Group.

On Mar 5, 2018, Nordstrom entered into a partnership with Urban Outfitters’ Anthropologie to offer more than 200 items from Anthropologie Home at the select Nordstrom full-line stores as well as online.

On Mar 1, 2018, Nordstrom posted 4Q17 results, wherein quarterly adjusted earnings of $1.20 per share missed the Zacks Consensus Estimate of $1.24. Total revenues advanced 8.9% year over year (y/y) to $4,702 million.

Revenues

Nordstrom’s total revenues advanced 8.9% y/y to $4,702 million in 4Q17. While the company’s net Retail revenues increased 8.4% to $4,600 million, Credit Card revenues surged 39.7% to $102 million.

Total comparable-store sales (comps) rose 2.6%. Net sales at Nordstrom full-line stores (including the United States and Canada full-line stores, and and Trunk Club) were up 6.4%, with comps rising 2.4%. Notably, the best-performing merchandising categories were Men's and Kids' Apparel.

Coming to Nordstrom Rack (that includes Nordstrom Rack stores and HauteLook), net revenues improved 15% while comps were up 3.7%.

Guidance

For fiscal 2018, net revenues are projected in the band of $15.2-$15.4 billion, with comps growth in the 0.5-1.5% range.

Margins

Nordstrom's Retail gross profit margin contracted 42 bps to 35.6%, mainly on account of increased occupancy expenses related to new store expansion for Nordstrom Rack, and in Canada and the New York City Men’s flagship. Further, inventory rose 6.9% while merchandise margin met the company's expectations reflecting persistent momentum in regular price selling trends.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, improved 243 bps to 30.1% mainly driven by increased marketing, technology and supply chain costs related to the company's growth efforts.

Guidance

For fiscal 2018, management expects EBIT to lie between $885 million and $940 million, which is likely to be reduced by roughly $30 million due to the revenue recognition accounting changes.

Earnings per Share

Nordstrom's adjusted earnings came in at $1.20 per share in 4Q17 that declined 12.4% year over year. On a GAAP basis, the bottom line came in at 89 cents per share compared with $1.15 in the year-ago quarter.

Guidance

Nordstrom envisions fiscal 2018 earnings per share in the range of $3.30-$3.55, excluding the impact of share repurchases.

|Research Analyst |Rashmi Jaiswal |

|Copy Editor |Annesha Bhattacharjee |

|Content Ed. |Rajani Lohia |

|Lead Analyst |Rajani Lohia |

|QCA |Sumit Singh |

|No. of brokers reported/Total |14/14 |

|brokers | |

|Reason for Update |Earnings |

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May 2, 2018

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