Apparel retailer Nordstrom Inc. (JWN - Analyst Report) hit a 52-week high of $64.19 on April 3, 2014, before closing the session at $63.37. The company’s better-than-expected fourth quarter fiscal 2013 results and a 10% dividend hike have made investors upbeat on the stock. Moreover, the stock currently trades at a discount to the industry average based on forward earnings estimate, which provides further upside potential.
However, the primary question here is to whether the stock will be able to sustain this momentum given the meager 2.3% growth witnessed since the start of 2014.
The sustainability of this momentum also looks apparently difficult given the company’s tempered outlook for fiscal 2014. The company’s projections for fiscal 2014 reflect higher costs across the board due to the ongoing infrastructure investments and pre-opening costs related to its Canadian venture along with its Rack store expansion plans. This cost inflation is further expected to impact earnings throughout fiscal 2014.
Higher costs projections for the year reflect SG&A expenses, as a percentage of sales, to rise 10 to 30 bps. Additionally, the company estimates the Canadian venture along with its expansion plans for Rack stores will raise depreciation and rent expenses in fiscal 2014.
As a result, the company projects depreciation and amortization of nearly $514 million in fiscal 2014, representing 13% growth from the fiscal 2013 level. Rent expenses for fiscal 2014 are expected to rise 17% from the fiscal 2013 level to $147 million.
As a result, Nordstrom expects fiscal 2014 earnings to come in the range of $3.75–$3.90 per share, assuming shares outstanding of nearly 196 million. Moreover, the company anticipates loss before interest and taxes of $35 million for Canada in fiscal 2014 compared with a loss of $14 million incurred in fiscal 2013.
This weak outlook has triggered a downward trend in the Zacks Consensus Estimate for fiscal 2014 and 2015. Estimate for fiscal 2014 have gone down 5.9% to $3.86 per share whereas for fiscal 2015 it has declined 8.3% to $4.20 per share, over the last 60 days. Moreover, Nordstrom’s long-term expected earnings per share growth of 10.2% is lower than the industry average of 14.7%.
Moreover, sluggish macroeconomic backdrop and seasonality of business are other significant challenges. Moreover, it faces stiff competition from players like The Gap, Inc. (GPS - Analyst Report), and Abercrombie & Fitch Co. (ANF - Analyst Report), which can dent its top line as well margins.
The above-mentioned factors currently keep the company at a Zacks Rank #4 (Sell). Another better ranked retail stock which can be considered for investment includes Foot Locker, Inc. (FL - Analyst Report) that carries a Zacks Rank#2 (Buy).