May 17, 2013
Recommendation: C-rated Hold
Welcome to the Stock of the Day for May 17, 2012. Last summer, I downgraded Nordstrom Inc. (JWN) to a hold after the company missed estimates for Q1 2011. Now, a year later, the stock hasn't recovered its stride. But with the latest quarterly results hot off the presses, can Nordstrom's get its groove back? And how does Nordstrom's stack up to the competition in this challenging retail environment? Let's dig into the details.
Company Overview: With over 61,000 employees and operations across 31 states, Nordstrom Inc. represents one of the largest upscale department store chains in the country. Currently there are 117 Nordstrom locations as well as 127 Nordstrom Rack clearance stores and two Jeffrey boutiques. With over 111 years in the business under its belt, there's no doubt that Nordstrom has staying power, but lately the retailer has been hit by soft demand for spring merchandise and softer performance in two regions: The Northeast and the Midwest.
Earnings Rundown: So Nordstrom reported weak operating results for the first quarter before today's open. Compared with Q1 2011, net income declined 2% to $145 million. Now, adjusted earnings improved to $0.73 per share, but this still missed the $0.76 consensus estimate by 4%. Meanwhile, net sales climbed 10% year-over-year as Nordstrom opened 16 new stores last quarter. But the $2.75 billion in sales that the company reported still missed the $2.8 billion consensus estimate. Finally, the company has also cut its sales outlook for fiscal 2013. For the full year, Nordstrom still expects earnings in the range of $3.65 to $3.0 per share, but it now expects just 4% to 6% total sales growth. This is down from management's previous estimate of 4.5% to 6.5% sales growth.
Industry Breakdown: Nordstrom Inc.'s main competitors are high-end department chains Bloomingdales Inc., Neiman Marcus Inc. and Saks Fifth Avenue Inc., all of which are privately held. Within the larger Apparel Stores industry, which boasts 91 separate retailers, Nordstrom's toward the top in terms of market cap. This company also stands out in terms of its 2% dividend yield, which is ranked at seventh, and its return on equity, which is 11th highest in the industry. Nordstrom also does particularly well in terms of sales growth and earnings growth, which fall in the upper quartile of all Apparel Stores companies. I will say that if you're looking for a premium retailer, I'd first recommend Macy's Inc. (M), which is doing better in terms of analyst earnings revisions and cash flow. Add this to healthier institutional buying pressure, and M is currently a B-rated Buy.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. JWN, on the other hand, is a hold right now due to mediocre institutional buying pressure, which is an indicator for a stock's risk-to-reward potential. And on the fundamentals side, there is plenty of room for improvement, especially in terms of operating margin growth, analyst earnings revisions and its track record of beating the consensus earnings estimate. Nordstrom's is doing well in terms of sales growth, earnings growth and return on equity. Overall, JWN receives a D for its Quantitative Grade and a B for its Fundamental Grade.
Bottom Line: As of this posting, May 17, I consider JWN a C-rated hold.