by Tom Taulli | September 4, 2013 1:57 pm
A few weeks ago, Nordstrom (JWN) joined the parade of poor upscale retail stocks — such as Macy’s (M), Coach (COH) and Tumi (TUMI) — posting subpar earnings, and its shares have been on the slide since then.
While JWN has proven to be a reliable performer for investors, averaging an amazing 18% annually for the past decade, is it time to worry about a new long-term downtrend? Or should you buy Nordstrom, believing in the inevitable rebound? To see, we look at the stock’s pros and cons:
Outstanding Service: Nordstrom is synonymous with legendary customer service, which has been part of its DNA for its century-plus life. Because of that, much of Nordstrom’s marketing is word-of-mouth, which is even better in a world of social media, where it’s easy for customers to voice their opinions. JWN has a major presence on key platforms like Twitter, Facebook (FB), Yelp (YELP) and Pinterest. Nordstrom also is leveraging mobile technology for in-store service, such as a trial program that allows salespeople to access customer profiles for people who have downloaded a specific mobile app. This should help representatives answer questions, improve personalization and provide for better inventory management.
High-Quality Merchandise: JWN continues to provide high-quality merchandise thanks to key strategies including forming partnerships, making investments and buying companies. Some examples include a venture with British brands Topshop and Topman; the acquisition of top designer Jeffrey; an investment in Peek, which focuses on kids’ wear, and the purchase of flash-sale marketplace HauteLook.
Canada: While Nordstrom is primarily focused on the U.S. market, the company is seeking growth outside America’s borders. The first phase is a movement into Canada. It’s a smart strategy because of the close proximity of distribution, as well as the country’s favorable income levels. The goal is to roll out eight to 10 full-line stores, as well as 15 to 20 Nordstrom Racks over the next few years. In all, these should produce revenues of about $1 billion.
Competition: Nordstrom is feeling some pressure from the lower end, especially from Macy’s. Over the years, Macy’s has been focusing more on quality products that have reasonable prices. Interestingly enough, luxury operators like Saks (SKS) and Neiman Marcus are also devoting more to the lower-end luxury segment.
Fashion: JWN is in a variety of the categories that are especially vulnerable to fickle consumer trends, such as apparel. True, Nordstrom has a long-history of keeping abreast of the latest trends, but there are no guarantees in retail. Also, fickleness isn’t just about changes in tastes, but also in overall products. Should the economy improve, consumers might not necessarily jump right to the high-priced jeans, but instead the new car or home they’ve been holding off on buying — and because of that, they might begin to cut back on discretionary purchases.
Credit Card Business: JWN controls its own operation. While this is important for providing strong customer service, there are issues. Credit cards are subject to tremendous regulations and suck up lots of capital. There also are credit risks, which could expose the company to potentially large losses. It’s these kinds of factors that have led other retailers, like Target (TGT), to unload their credit card divisions.
Nordstrom remains a top-notch retailer whose brand is associated with quality across the board, and it seems to have plenty of growth prospects, especially in foreign markets. Not to mention, it’s making smart investments in e-commerce and mobile.
Meanwhile, JWN sports a reasonable valuation of 15 times earnings — on par with retailers such as Walmart (WMT) and Target, which have slower growth rates — and offers a decent dividend currently yielding 2.2%.
So should you buy Nordstrom? Yes — the pros heavily outweigh the cons, and JWN looks especially attractive on this pullback.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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