Clothing retailers are a dangerous place to put your money. Even the high-end brands like Nordstrom Inc. (NYSE:JWN) are not insulated from economic downturns or suddenly shifts in consumer taste.
While JWN is more secure than other more trendy retailers, I’ve never really liked the idea of clothing retailers because they are among the most fickle and unpredictable consumer discretionary plays.
If you’re going to play in the consumer space, either stay away from retail or buy an exchange-traded fund.
That being said, let’s look at Nordstrom earnings and see what we can learn from them.
JWN Earnings Are a Mixed Shopping Bag
The bad news is that EPS came in “as expected” at 66 cents per share, which was a decline from last year’s 72 cents per share. That’s $128 million versus $140 million last year. That came on a 9.8% increase in sales and a 4.4% increase in same-store sales.
If JWN can’t turn those kinds of increases into an EPS gain, I have concerns about the company’s operational efficiency.
Consequently, you would assume margins fell, which they did. EBITDA came to just 7.9% of net sales, vs. 9.3% last year.
This, by the way, came despite opening two new stores and 10 new Nordstrom Rack stores, and seeing a 50% increase in online sales growth. Operating cash flow came in at $208 million, but $259 million in capex meant free cash flow was negative $51 million. After factoring in the dividend, which drained another $71 million, Nordstrom ended with negative free cash flow of $122 million. Last year, Q1 FCF was negative by $20 million after the dividend.
Now, we can blame some of these disparities on the fact that JWN bought Trunk Club last year, and assume that money is being poured into growth initiatives. The only real way to be certain is for a few more quarters to go by.
For the full year, JWN is expecting a 7% to 9% increase in sales, a 2% to 4% increase in comps, a 5 to 15 basis point decrease in gross profit margins, and a 55 to 65 basis point increase in SG&A expenses. EPS are expected to come in between $3.65 and $3.80.
JWN finished the quarter with $769 million in cash, and $3.14 billion in debt, which is only being held at about 4% interest. Also, $43 million of net income came from its credit business, so a full third of net income is being generated by customers using credit for purchases. That’s a nice gig, provided losses aren’t too high.
Bottom Line on Nordstrom Stock
Nordstrom stock is just puttering along. With the stock closing Thursday around $75, it trades at a FY15 price-to-earnings ratio of about 20. But that’s not much of an increase over last year, and analysts expect 7.45% annualized growth for the next five years. When we add in the 1.9% yield, we get a total growth rate of 9.35%. So even if we granted Nordstrom stock a 20% premium for no good reason, it might be fairly valued at 11 or 12 times earnings.
I have no idea why the market is valuing Nordstrom stock at close to twice its fair value. That is exactly why you should sell if you hold it, and stay away if you don’t.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Lawrence has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
