EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Nordstrom Opens 2019 With Weak Sales; Shares Undervalued

Narrow-moat Nordstrom’s first-quarter 2019 sales of $3.35 billion missed our sales forecast of $3.49 billion as both full-price and Rack stores underperformed. Nordstrom experienced problems with merchandise mix and marketing efforts. Weak areas included women’s apparel and cosmetics, where Nordstrom suffered stock-outs. We think Nordstrom lost sales to competitors who discounted post-holiday inventory. No-moat Kohl’s also reported weak women’s apparel sales in its April quarter. Nordstrom’s EPS of $0.23 in the first quarter missed our forecast of $0.30. While Nordstrom’s operating margin of 2.3% lagged our forecast of 2.7%, most of the shortfall was due to the soft sales. We think the outlook for the second half of 2019 looks better due to the opening of the flagship store in Manhattan in October and the Anniversary Sale. Still, we think it will take some time for Nordstrom to fix some of its marketing and improve merchandise selection. Further, we think expanded tariffs pose a risk for Nordstrom in the short-term as apparel and shoes comprise more than 75% of its sales. We had previously forecast 1.7% sales growth for Nordstrom in 2019, but now expect a slight decline. We expect to reduce our 2019 EPS forecast of $3.77 by about $0.35 and expect a single-digit percentage decrease in our fair value estimate of $56. We do not change our long-term forecast of about 2% annual growth. As Nordstrom shares have been weak in anticipation of a challenged 2019, we view shares as attractive at current levels.

Nordstrom has strengths which we think will play out over time. We believe the power of Nordstrom’s brand is seen in its loyalty club of nearly 12 million members, which produced more than 60% of its first-quarter sales. Further, we think Nordstrom’s “Generational Investments”, which include e-commerce and Los Angeles’ Nordstrom Local stores, are beginning to work. Digital produced 31% of sales in the first quarter, up from 28% last year. These investments have lowered Nordstrom’s operating income by at least $135 million in every year since 2015, but we think the heavy spending period is coming to an end. We forecast Nordstrom’s operating margin will improve about 50 basis points next year to 5.9%, in line with the 2017 result. In the long-term, we forecast operating margins will gradually improve to 6.3% by 2028.