EUR 850.00 For Business Accounts Only

Morningstar | Mixed Holiday Sales at Narrow-Moat Nordstrom, but 2019 Outlook Better; Shares Undervalued

Nordstrom closed 2018 with a fourth quarter that was in line with its mid-January update. While Nordstrom reported healthy same-store sales of 4.0% in the off-price channel for the quarter, same-store sales of negative 1.6% in the full-price business were disappointing. The full-price channel was affected by slow sales of women’s apparel on poor merchandising and discounting at competing branded stores. Nordstrom’s 2018 fourth-quarter sales of $4.38 billion missed our forecast of $4.55 billion, but EPS of $1.48 exceeded our forecast of $1.42 on a tax benefit of $0.05 per share. While Nordstrom’s 2019 first quarter will likely be affected by discounting of post-holiday inventory, we think the outlook for the rest of the year looks brighter. Nordstrom provided 2019 operating margin and EPS guidance of 5.9%-6.1% and $3.65-$3.90, respectively. Since we had expected an operating margin of 5.8% and EPS of $3.69, we don’t anticipate any material change to our $55 fair value estimate. We maintain our narrow moat rating on Nordstrom based on its intangible brand asset and view the shares as undervalued.

We believe Nordstrom has a solid plan to compete in a changing market. Although department stores continue to struggle with reduced traffic, we think Nordstrom has an edge due to its presence in upscale malls, its strong customer base (11 million club members), its off-price Rack business (annual sales growth of 8% over the past five years), and its large digital business. Digital has midteens annual growth and has grown to 30% from 24% of sales in two years. Nordstrom’s strategic initiatives, known as generational investments, contributed about $2 billion in 2018 sales but have reduced operating income by approximately $580 million over the past four years. We believe the investment phase is ending and operating margins will improve to 6.6% in 2021 from (adjusted) 5.9% in 2018. We think Nordstrom is managing well in a tough environment for apparel retailers.