Morningstar | Nordstrom’s Brand Power, E-Commerce, and Rack Stores Allow for a Narrow Moat; Shares Undervalued
We maintain both our narrow moat rating and $55 fair value estimate on Nordstrom. We think Nordstrom continues to be a top operator in the fragmented U.S. apparel market. While no-moat competitors Macy’s and Kohl’s have suffered stagnant sales on competition from e-commerce, discounters, and others, Nordstrom has increased revenue from about $10 billion to $16 billion between 2010 and 2018. Its full- and off-price stores have consistently reported positive same-store sales over this period (whole company average of 4%). We think Nordstrom has a good mix of full-price stores in Class A malls, off-price Rack stores, and e-commerce.Our valuation assumes consistent growth and margins for Nordstrom. We expect steady sales increases over the next decade (from $16 billion in 2018 to $20 billion in 2027) and operating margins in the 6%-7% range. For the 2019-27 period, we forecast full-price same-store sales in the range of 1.0%-1.5% and off-price same-store sales in the range of 2.5%-3.5%. We view Rack as a leader in the discount apparel space and expect this to continue from solid merchandising and a loyal customer base. Rack has consistently reported better same-store sales and sales per square foot than competitors.
Nordstrom’s somewhat disappointing sales at full-price stores in the holiday 2018 period do not change our view on its brand strength. While overall same-store sales of 1.3% in the period fell short of holiday 2017 same-store sales of 2.5%, its off-price business experienced solid 3.9% same-store sales. Moreover, its digital sales increased 36%. While we acknowledge competitive forces will continue to affect full-price apparel retail, we think that Rack and e-commerce will continue to perform well and that Nordstrom’s investments (which have depressed operating income over the past few years) will help. Notably, the flagship Manhattan store opens later this year.
We view Nordstrom, down sharply since early November, as attractive at current levels.
Nordstrom is a fashion retailer providing a selection of brand-name and private label apparel, shoes, cosmetics and accessories for women, men, young adults and children. The company serves customers through two businesses: Full-Price and Off-Price. The company's operations consist of the company's Nordstrom U.S. and Canada full-line stores, U.S. and Canada Nordstrom Rack stores, Jeffrey boutiques, Last Chance clearance stores, Trunk Club clubhouses and Nordstrom Local. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com, HauteLook and TrunkClub.com.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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