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Nordstrom (JWN) Stock Rises 65% in a Year: More Upside Left?

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Nordstrom, Inc. (JWN - Free Report) has been benefitting from favorable demand, better inventory, stringent cost-cutting actions, and improved sales trends at Nordstrom and Nordstrom Rack as well as across regions and categories. Strength in shoes, apparel and accessories along with home and designer categories also bodes well.  

This led to strong second-quarter fiscal 2021 results, wherein the top and bottom lines improved year over year. Total revenues surged 96.4% year over year. Revenues also improved 700 bps from the second quarter of fiscal 2021, marking the fourth straight quarter of sequential growth. Improved margins and lower costs aided the bottom line.

In the past seven days, the company’s estimates for fiscal 2021 earnings per share have moved up 4.3%. For fiscal 2021, its earnings estimates are pegged at 53 cents per share, suggesting a surge of 140.9% from the year-ago reported figure.

We note that shares of this Zacks Rank #3 (Hold) company have rallied 65.9% in a year’s time compared with the industry’s growth of 86.7%.

 

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Factors Supporting Growth

The company’s e-commerce business acts as a major growth driver. Some notable efforts on this front include technology advancement, improved supply-chain process and better marketing initiatives. As a result, digital sales in the fiscal second quarter advanced 30% year over year and 24% on a two-year basis. The digital business witnessed gains from improved digital traffic across both Nordstrom and Nordstrom Rack. The company also completed the integration of Rack.com onto Nordstrom.com, thus, offering a better customer experience.

Management raised the fiscal 2021 view. The company anticipates revenue growth of 35%, up from the earlier mentioned 25%. It expects an EBIT margin of 3-3.5% compared with the previously mentioned 3%. Nordstrom forecast sales improvement in the third and fourth quarters of fiscal 2021 on a sequential basis. The EBIT margin is likely to rise further, with gross margin improvement in the fiscal fourth quarter, driven by better inventory management and lower promotions.

Nordstrom remains focused on its long-term strategy, which aims at enhancing its digital-first platform, expanding the reach of Nordstrom Rack, gaining market share and delivering growth. As part of the strategy, the company continues to scale enhanced capabilities like the expansion of order pickup and ship-to-store to all Nordstrom Rack stores. It noted that nearly 40% of next-day orders were picked up from Rack stores during the anniversary sale.

Per its closer-to-you strategy, the company aims to link stores and services to expedite deliveries, expand online offerings, and add cheaper merchandise at its Rack off-price stores to improve customers’ shopping experiences. It is also on track with the integration of Nordstrom Rack assets and offering a wide range of price points offered at Nordstrom Rack. Increased focus on distribution capabilities along with improved connectivity of physical and digital inventory is likely to contribute to Nordstrom Rack sales by $2 billion in the long term.

Management envisions its digital unit to account for 50% of total sales. A rise in new customers, enhanced personalization, expanded product offering are also expected to aid revenue growth, profit margin and generating cash flow in the long term. Consequently, it predicted low-single-digit revenue growth on an annual basis, with operating income outpacing revenues in the long term. The EBIT margin is expected to be more than 6%, with an annual operating cash flow of $1 billion.

Headwinds to Overcome

Nordstrom is yet to get back to its pre-pandemic levels, as evident from comparisons with second-quarter fiscal 2019. Notably, the top line declined 6% from the second quarter of fiscal 2019. Sales for Nordstrom and Nordstrom Rack brands reflected declines of 5% and 8% from second-quarter fiscal 2019, respectively.

The company is also incurring higher freight and labor expenses, which led second-quarter fiscal 2021 EBIT to decline $65 million on a two-year basis. SG&A expenses also increased 170 bps from second-quarter fiscal 2019. Management expects higher freight and labor costs to persist in the second half of fiscal 2021, which, in turn, is likely to result in higher SG&A from the first half.

Conclusion

We believe that solid demand and well-chalked-out endeavors will offset cost woes and drive growth in the near term. Also, a VGM Score of A and a long-term earnings growth rate of 6% reflect its inherent strength.

Other Stocks in the Retail Space

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The Children’s Place (PLCE - Free Report) has a long-term expected earnings growth rate of 8% and it currently sports a Zacks Rank #1.

Foot Locker (FL - Free Report) , a Zacks Rank #1 stock at present, has an expected long-term earnings growth rate of 4%.