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JWN vs GPS: Which Retail Stock is Better Placed at the Moment?

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After more than a year of the pandemic-led wear and tear, the retail industry is currently on the road to recovery. With the vaccination drive in full swing, easing of restrictions and reopening of economic activities, consumers are now returning to their active social lifestyle. As a result, the retail industry is now doing much better than the last year with renewed momentum in retail markets, particularly apparel. This resulted in increased traffic across stores and malls.

Although the need to see and try on products holds true for apparel, the online shopping boom continues to outlast the virus. Industry experts also believe that the convenience of drive-through, one- and two-day shipping and curbside pickup are likely to remain popular even as the virus fades.

To succeed in 2021, apparel retailers are adjusting their strategies, as per evolving changes in consumer behavior. Players in the industry are making efforts to analyze changes in consumer mindset and spending patterns post-vaccination. Young shoppers seem to be the most enthusiastic to dress up and go out again. They are embracing pandemic-inspired fashion too. That said, the rise in the casual and comfort clothing trend and growing consumer interest in a healthy lifestyle continue to propel retail growth.

Moreover, retail companies have been focusing on improving customer engagement, creating innovative and in-demand products, and enhancing digital and data analytics capabilities. Apart from upgrading digitally, companies are coming up with unique products and better deals. Some retailers gaining from this sustained online trend are Abercrombie & Fitch (ANF - Free Report) and Foot Locker (FL - Free Report) .

Encouragingly, NRF revised its growth prediction for 2021 retail sales to $4.44-$4.56 trillion (10.5-13.5% growth), claiming it to be the fastest growth in the United States since 1984.

Given this encouraging backdrop, it is not a bad idea to undertake a comparative analysis of two prominent apparel players — Nordstrom (JWN - Free Report) and Gap (GPS - Free Report) . Let’s delve deeper into factors beyond rank, since both companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Market Cap

Nordstrom’s market capitalization is $5.48 billion while that of Gap is $12.19 billion. Considering the business size, Gap undoubtedly has an edge over Nordstrom and is better positioned for the long term, courtesy of its massive scale of operations. However, short-term industry trends are likely to equally have a bearing on both companies.

Sales Performance

Nordstrom’s net revenues increased 44% in first-quarter fiscal 2021. This marked the third straight quarter of sequential top-line growth. The top line gained from broad-based improvement across the Nordstrom and Nordstrom Rack brands, both in stores and online, driven by robust customer demand. Further, sales growth reflected overall improved trends, with growth across regions and merchandise categories. The company witnessed an acceleration in pent-up demand throughout the reported quarter as normal activities resumed, including social events, travel and return-to-office. Moreover, management noted that the sequential top-line growth trends continued in the second quarter of fiscal 2021.

Nordstrom also remains focused on advancing in the technology space, by boosting e-commerce and digital networks, and improving its supply-chain channels and marketing efforts. In first-quarter fiscal 2021, digital sales advanced 23% year over year and 28% from the first quarter of fiscal 2019. The digital business witnessed gains from its efforts to unleash the full potential of its digital-first program. In the fiscal first quarter, digital sales represented 46% of net sales compared with 54% in the year-ago quarter. Notably, the Nordstrom and Nordstrom Rack apps acted as key drivers.

Meanwhile, Gap’s net sales surged 89% year over year and 8% from the 2019 pre-COVID levels during first-quarter fiscal 2021. The company delivered sales surprises in the last four quarters. The top line benefited from strength in its Old Navy and Athleta brands, growth in the Gap business in North America, and market share gains. Further, the reopening of the majority of stores aided sales. Also, the company continued to witness strength in the online business despite the opening of stores. Moreover, comparable sales (comps) rose 28% year over year and 13% from first-quarter fiscal 2019.

Further, Gap continued to witness strength in the online business, with digital sales increasing 61% year over year and 82% from the first quarter of fiscal 2019. Notably, digital business contributed 40% of total sales in the reported quarter. Continued growth in the e-commerce business contributed significantly to the company’s consolidated sales and gains from its Gap, Old Navy and Athleta brands. Going ahead, management remains keen on optimizing its mobile experience as a key priority in 2021. It launched its native Android app in March, which is gaining traction.

Backed by a strong start to fiscal 2021, Gap raised its year-over-year sales view from mid- to high-teens growth to low-to-mid twenty percent growth. On the flip side, Nordstrom anticipates total revenue growth of more than 25% year over year in fiscal 2021.

Earnings History & Projected Growth

Considering a comprehensive earnings history, both Nordstrom and Gap reported earnings surprises in just two of the trailing four quarters. Notably, Gap has delivered an earnings surprise of 659.4%, on average, in the trailing four quarters. Its long-term (three to five years) earnings growth rate is pegged at 12%.

Meanwhile, Nordstrom delivered an earnings surprise of 532.7%, on average, in the trailing four quarters. Its long-term earnings growth is projected at 6%.

Estimate Movement

While comparing earnings estimates for the last 30 days, Nordstrom’s earnings estimates for fiscal 2021 have increased 2 cents (up 1.7%), whereas Gap’s estimates advanced 34 cents (up 24.8%). Further, Nordstrom’s earnings are expected to grow 127.1% in fiscal 2021 compared with Gap’s improvement of 181%. Here, Gap has an edge over Nordstrom.

Price Performance

Nordstrom’s shares have surged 100.3% in the past year, underperforming the broader industry’s 159% growth. However, Gap’s shares have returned 183.2%, surpassing the broader industry’s growth. From a broader viewpoint, both Nordstrom and Gap’s shares have outperformed the 39.1% growth recorded by the S&P 500 index.

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Both Nordstrom and Gap look undervalued when compared with the industry average, implying that there’s more upside left for the stocks. Gap has a trailing 12-month price-to-sales (P/S) ratio of 0.79x, which is below the industry’s average of 1.71x. Similarly, Nordstrom’s has a slightly lower P/S ratio of 0.47x. Moreover, Nordstrom’s Momentum Score of A, in comparison with Gap’s Momentum Score of B, makes Nordstrom a preferred investors’ choice.

Our Take

Our comparative analysis shows that Gap has an edge over Nordstrom in terms of price performance, estimate revision and fiscal 2021 earnings growth. Fundamentals of both companies are solid. Meanwhile, Nordstrom scores higher only on the valuation front, which suggests more upside left for the stock. As the scale is significantly tilted toward Gap, the stock discernibly makes a more promising investment proposition.

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In-Depth Zacks Research for the Tickers Above

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Abercrombie & Fitch Company (ANF) - free report >>

Nordstrom, Inc. (JWN) - free report >>

The Gap, Inc. (GPS) - free report >>

Foot Locker, Inc. (FL) - free report >>