Shares of Nordstrom (JWN - Free Report) slipped as much as 6% Tuesday after the firm laid out an ambitious five-year growth strategy “to be the best fashion retailer in a digital world.” ahead of its Investor Day meeting.
Why Are Investors Doubtful?
Tuesday’s dip is a reflection of investor concern about Nordstrom’s profitability moving forward. The company reaffirmed its fiscal year 2018 outlook, projecting $15.2 to $15.4 billion in net sales on between $3.35 and $3.55 in earnings per share. It also maintained comps growth projections of 0.5% to 1.5% for the year. Furthermore, Nordstrom expects net sales to grow 3% to 4% on an average annualized basis from 2017 to 2022
These numbers fit within our Zacks Consensus Estimates of $3.45 in earnings per share and $15.7 billion in revenue. However, it is worth noting that firms are typically conservative in issuing guidance numbers.
There are concerns about JWN’s competition with e-commerce brands such as Amazon (AMZN - Free Report) and other trendy names, as well as slowing foot traffic in malls. Edward Yruma, an analyst at KeyBlanc Capital Markets, downgraded the company from Overweight to Sector Weight, citing concerns about capital burden of the firm’s various initiatives. His argument is that while the moves are solid, they are not stopping the overall consumer trend of gravitating towards online shopping.
Is Nordstrom Performing That Poorly?
The short answer is no, not really. In its most recent earnings report, Nordstrom saw earnings of $0.51 per share on revenues of $3.56 billion, representing a 37.8% and 5.8% respective year-over-year increase. Both metrics comfortably topped our Zacks Consensus Estimates of $0.42 per share and $3.47 billion.
A key highlight from the report is the company’s digital performance. Specifically, it saw an 18% increase in digital sales and a 4% boost in digitally-enabled sales contribution. The firm also expanded its physical presence, opening eight stores and closing one. Four of the stores were part of its full-price division and are located in New York City, Toronto, and Calgary, while the other four are its off-price Nordstrom Rack line. Nordstrom projects $1 billion in sales opportunity from its Canada expansion by 2020.
Another point worth noting is that the company’s locations saw a 0.6% overall increase in comps for the quarter, which while positive is softer than expected. However, this is due to the cannibalization of off-brand store sales by the company’s growing online segment.
Investors may also be concerned about the company’s profit margins. It lowered again by 21 bps to 34.1%, after a decline of 25 bps, 12 bps, and 42 bps in the second, third, and fourth quarters of FY17. While this downward trend is a reasonable source for concern, it is a result of the company spending cash to launch new locations and invest in digital technology. In other words, the company is sacrificing a portion of profitability now to make more cash later.
Earlier this year, the Nordstrom family attempted to take the company private through a $50 per share purchase proposal, representing a slight discount to the nearly $52 per share at the time. However, the board of directors turned down the deal, feeling that it was not in the best interest of the company. This could be seen as a sign that the board is confident in the company and its growth initiatives. They may be on to something, as shares of Nordstrom are performing respectably year-to-date compared to industry counterparts:
The market also seems to realize that Tuesday’s reaction was overblown, as shares of JWN are up 1.8% in morning trading on Wednesday. It sits just about 1% lower than its pre-announcement value, with the stock having now corrected most of the 6% loss that it saw through mid-day trading on Tuesday.
While brick-and-mortar retail is under fire by the rapid rise of e-commerce, Nordstrom is positioning itself to grow in market share and reach a larger overall consumer population. Doing so will require money, making the short-term decrease in margins necessary and justified.
The firm has seen mostly downward earnings estimate revisions for the current and following quarters, but revisions for the fiscal year are mostly positive, with six upward versus two downward revisions. This mixed activity has Nordstrom currently sitting at a Zacks Rank #3 (Hold). Nordstrom’s ambitious growth plans still appear to be within reach, but cautious investors might consider continuing to monitor the firm moving forward.
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