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Morningstar | Nordstrom’s 3Q Results Obscured by One-Time Credit Charge, Fundamentals Intact; Shares Fairly Valued

Narrow-moat Nordstrom’s third-quarter results were overshadowed by an unexpected credit charge ($72 million) stemming from overcharging delinquent accounts dating back to 2010 (less than 4% of cardholders were impacted). Management again updated full-year guidance due to near-term results with sales expected to fall between $15.5 and $15.6 billion (up from $15.4 to $15.5 prior, and near our $16 billion estimate) while the lower end of the adjusted EPS forecast was raised by a nickel (to $3.55-$3.65 up from $3.50-$3.65). We do not intend to materially alter our $53 fair value as near-term results are tracking with our full-year expectations (3% sales growth and EPS of $3.63) and we believe the long-term thesis (synergies through off-price Rack stores, omni-channel development and loyalty program expansion) is intact calling for 2.5% sales growth against 6% operating margins on average over the next 10 years. With the 9% stock price decline after-hours, we see shares as fairly valued, trading at 14 times our 2019 EPS estimate.

Nordstrom reported a 2.3% comparable sales increase (slightly below our 2.7% estimate) with Nordstrom Rack’s comps increasing a robust 5.8% while full price only increased 0.4%. We contend the discount store’s performance, like the namesake location, is driven by the firm’s brand intangible assets (strong curated product selection) which underpin our narrow moat rating. We would be more optimistic if the growth was evenly spread between both channels as strategic brand partners (45% of full priced sales) may be less willing to partner with Nordstrom in the long run if their merchandise is pushed through off-price channels.

We are encouraged by the progress of the firm’s generational investments with digital sales representing 30% of sales year to date (up 18%) and the 11 million loyalty members contributing 56% of sales. We see these as brand-accretive factors as they highlight the firm’s omnichannel abilities and best-in-class service.