Company Reports

Nordstrom showed progress on its sales initiatives in the first quarter, although some unusual factors negatively affected its gross margin. More importantly, the firm held to its full-year guidance for same-store sales of down 1% to up 2%, an EBIT margin of 3.5%-4%, and $1.65-$2.05 in earnings per share. As our forecast aligns with this outlook, we do not expect to make any material change to our $38.50 fair value estimate, leaving shares very undervalued. Although its results have been rocky since the pandemic, we think Nordstrom can reach its 6% operating margin goal in about two years.

Confirming a recent media report, no-moat Nordstrom’s board has formed a special committee to evaluate a possible offer by Erik and Pete Nordstrom to take the company private. According to a related 13D filing, Erik (CEO) and Pete (president) are acting as trustees for their elderly father and largest shareholder, Bruce Nordstrom. As a group, members of the family own about 30% of the company. Thus far, no offer price has been reported, and funding has not been arranged. The latter could be a roadblock given the current higher interest rates. More importantly, as Nordstrom’s shares trade at about half our per-share $38.50 fair value estimate, we are concerned that an offer price may not provide full value to shareholders. About six years ago, the Nordstrom family proposed taking the company private at a much-higher price of $50 per share, but the offer was rejected by the board due to funding uncertainty and concern that the offer was too low.

Nordstrom has a loyal customer base built on differentiated fashion products, quality brands, and first-rate service. While we used to think that these strengths provided a competitive advantage based on a brand intangible asset, we no longer believe that it does. Realistically, Nordstrom’s recovery from the pandemic has been rocky, and the US apparel retail market has only become more competitive.

Although no-moat Nordstrom’s fourth-quarter sales and adjusted profitability surpassed our expectations, its shares slid 9% in aftermarket trading on March 5 as its 2024 guidance was underwhelming. Like some peers in the retail space (including no-moat Macy’s), Nordstrom anticipates weak consumer demand for apparel, especially in the first half of the year. Given this outlook, we expect to lower our $40 per share fair value estimate by a mid-single-digit percentage. Even so, there are signs of progress at the company, including in its inventory control (down 3%), logistics, and costs.

We are adjusting our moat rating on Nordstrom to none from narrow as we no longer believe it has a competitive advantage based on a brand intangible asset. The company operates the largest US luxury department store company by sales, and Rack is one of the larger off-price concepts in the market. As such, we have historically believed it had an advantage over other traditional department stores like Macy’s and Kohl’s, both rated as no-moat. However, recent financial results suggest that the market forces, such wide-moat Amazon’s apparel offerings, that have drawn sales from traditional department stores are negatively impacting Nordstrom, as well. Over the past decade or so, its operating margins have declined to the midsingle digits from the low double digits as its sales growth has been inconsistent and its selling, general, and administrative costs have risen to about 34% of net sales from less than 28% prior to 2015. While its management often discusses various solutions to its problems, we anticipate significant spending will be needed to contend with the competitive threats to both of its nameplates.

Nordstrom has a loyal customer base built on differentiated fashion products, quality brands, and first-rate service. While we used to think that these strengths provided a competitive advantage based on a brand intangible asset, we no longer believe that it does. Realistically, Nordstrom’s recovery from the pandemic has been rocky, and the US apparel retail market has only become more competitive.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While its recovery from the pandemic has been rocky, its profitability has returned, and we believe its brand intangible asset is intact.

Narrow-moat Nordstrom showed progress on its strategic initiatives in the third quarter despite soft consumer demand. Its shares are very undervalued in relation to our $40 fair value estimate, which we do not expect to change materially. Our full-year estimates align with its guidance for a 4%-6% sales decline and $1.90-$2.10 in adjusted EPS.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While its recovery from the pandemic has been rocky, its profitability has returned, and we believe its brand intangible asset is intact.

Nordstrom’s second-quarter report beat expectations as its off-price sales fell less than expected. However, the firm did not change its full-year guidance of $1.80-$2.20 in adjusted EPS on a revenue decline of 4%-6% as the economic outlook is murky and sales trends in August appear to be slowing. Even so, we view Nordstrom’s shares as undervalued and do not expect to make any material revisions to our $40 fair value estimate. While recent results have been rocky, we classify Nordstrom as a narrow-moat retailer and do not believe its current valuation reflects its potential for margin improvement over the next two years to above 6% from about 4% (adjusted) at present.

Narrow-moat Nordstrom had progress on its strategic initiatives in 2023’s first quarter, despite uneven consumer spending and a write-down related to the shutdown of its Canadian operations. As the firm held to its 2023 outlook for a 4%-6% sales decline, an adjusted operating margin of 3.7%-4.2%, and adjusted EPS of $1.80-$2.00, we do not expect to make any material change to our $40 per share fair value estimate.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While its recovery from the pandemic has been rocky, its profitability has returned, and we believe its brand intangible asset is intact.

Narrow-moat Nordstrom’s 2022 fourth-quarter results were in line with our estimates (which had been lowered after its January update). However, the firm did deliver the surprising news that it will exit Canada, where it operates 13 stores (six full-line and seven Rack) and generates about 2.5% of its sales, within a few months. Nordstrom entered the nation in 2014 and had frequently highlighted Toronto as a key market but, likely due to a lack of scale and the pandemic, its operations were unprofitable. The firm expects one-time pretax charges of $300 million-$350 million due to closing costs and an investment write-down, but the move is expected to boost operating income by $35 million (or 7.5%) in 2023 relative to 2022.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and we believe its brand intangible asset is intact. Despite a rocky couple of years, we believe Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Narrow-moat Nordstrom reported a 3.5% decline in its November and December sales, putting it on track to miss our flat forecast for the January-ending fourth quarter. Perhaps more significantly, discounting was higher than anticipated as the firm managed down its inventory, now projected to close 2022 at roughly 2019’s year-end level. We expect to cut our $42 fair value estimate by a mid-single-digit percentage, but view Nordstrom as very undervalued. While its recent underperformance in comparison with some others is worrisome, we believe its profitability has bottomed and that it can raise its operating margins back to approximately 6% within two years. Moreover, we anticipate it will continue to pay its dividend, which offers a current yield above 4%.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and we believe its brand intangible asset is intact. Despite a rocky couple of years, we believe Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Although Nordstrom’s 2022 third-quarter results came in slightly above our modest expectations and the company reaffirmed full-year guidance, its shares dropped 9% in Nov. 22 postmarket trading. We attribute the reaction to the sluggishness of its recovery from the pandemic, as well as its relative underperformance as compared with some peers. Even so, Nordstrom’s retail sales decline of 3% bettered our negative 5% forecast, and we believe the positive effects of its product and supply chain efficiency efforts will become more apparent over the next couple of years. We do not expect to make any material change to our $42 fair value estimate and view Nordstrom’s shares as very attractive. Despite a slow recovery, we do not think the company’s brand intangible asset, the source of our narrow moat rating, has been impaired.

Investors have forsaken apparel manufacturers and retailers, which we believe present numerous attractive opportunities. These firms have struggled with many issues in 2022, including higher inventories, lower operating margins, inflation, logistical challenges, tough comparisons with 2021, low international travel, and an extremely strong U.S. dollar. However, we see positive signs. In recent weeks, shipping has shown signs of normalizing, and gas prices have dropped. Moreover, we anticipate inventory levels will improve as manufacturers cancel shipments and sales increase in the holiday season (as is typical). In 2023, we anticipate the benefits of investments in supply chains and other operations by many apparel firms will become more apparent. Consequently, despite widespread pessimism in the market, we believe now is a good time to consider the many apparel stocks trading well below our fair value estimates.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and we believe its brand intangible asset is intact. Despite a rocky couple of years, we believe Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and we believe its brand intangible asset is intact. Despite a rocky couple of years, we believe Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.