Nordstrom (JWN) is beginning to look really attractive, but is now the right time to buy? Almost, but not quite yet.
First, the instability of financial markets is such that, even with rallies Thursday and Friday, it’s not clear a bottom has been reached. So, let the financial markets prove they’re stable.
A second reason to wait on buying Nordstrom stock is that the company reports fiscal-fourth-quarter earnings after the close on Feb. 18. Better to give the stock time to shake out as investors dig into the numbers.
The company forecast 2015 comparable sales growth at 2.5% to 3%, down from prior guidance of 3.5% to 4.5%. That will be the most important number investors look at when the earnings come out. If the numbers meet the expectations and the guidance is decent, then Nordstrom, one of the best-managed department-store operators, becomes a bargain.
Some Lingering Reasons for Concern
Nordstrom stock was pummeled a week ago, hitting a 52-week low of $44.49 on Jan. 15. The shares are up 4% since Tuesday (though down 2% for the year-to-date). Part of the recent gain may be due to speculation that activists may force rival Macy’s (M) to spin off its real estate holdings into a separate investment vehicle. (Nordstrom is more likely to operate in leased spaces.)
Still, concerns remain. And while it’s tempting to say JWN’s problems are a function of the competitive pressures from Amazon (AMZN), that’s probably too facile an explanation. Let’s take a look at some of the bigger issues instead:
How people shop is changing. The big casualty is the big suburban shopping mall, where, for years, Nordstrom was often the jewel tenant. The slow and steady decline of these malls is putting pressure on Nordstrom stock.
Sales are flat or declining at its full-line stores and even at Nordstrom Rack stores. Comparable-store sales for Nordstrom Rack stores fell in the third quarter and may decline in the fourth, in part because warm weather during the holiday season hurt sales of winter clothing. The third-quarter decline at Nordstrom Rack was a shock because the business, with 194 stores, has been the biggest growth driver in recent years.
Nordstrom is still implementing a $1.2 billion investment in technology. The goals are to make its Nordstrom.com and Nordstromrack.com online shopping sites more robust for shoppers who want choice but don’t like spending hours browsing a store. When the cash demands of those investments tail off, the bottom line should benefit.
Shares probably just became too pricey. Not just for Nordstrom, but also for Macy’s, Dillard’s (DDS) and even JCPenney (JCP) whose shares are down 43% from their 2014 peak of $11.30. JWN rose about 950% between its low during the 2008 crash and its $83.16 peak in March 2015. The Standard & Poor’s peak gain after the big crash was 215%.
The financial markets have been a headwind for Nordstrom and other retailers. During the company’s third-quarter conference call, Co-President Blake Nordstrom said that Nordstrom noticed an abrupt drop-off in customer counts starting in August. Nordstrom wouldn’t speculate about the cause except to say that it occurred across the company and was sustained. That development forced reductions in inventory buying and markdowns.
The one thing that happened in mid-August was stock markets around the world abruptly sold off as China devalued its currency and worries mounted about how higher U.S. interest rates would affect the economy. The Dow suffered its worst one-month loss since the summer of 2011.
The market turmoil is important to Nordstrom because its affluent customer base will react to financial news. Retailers reported similar trends during the Debt-Ceiling Crisis that erupted in the summer of 2011. U.S. stocks fell nearly 20% in the five months between May and September 2011.
To complicate matters, while many analysts believe the market gyrations represent pure emotional reactions, many big investors may have programmed their computers to buy and sell on the most subtle of signals. Some reports suggest a number of big institutional investors, such as sovereign wealth funds, are liquidating portfolios. Hence the violent market moves.
Why You Should Still Like Nordstrom Stock
However, Nordstrom stock has some considerable strengths behind it.
Nordstrom stores are not just stores. They’re brands like Saks Fifth Avenue and Bloomingdale’s. Even Nordstrom Rack has a certain cachet. At the very least, one shops at Nordstrom for special occasions.
JWN is well managed. Its return on equity over the 12 months that ended in September was 36%, compared with 28.3% for Macy’s and 17% for Dillard’s. It bought more than $500 million in stock in the first three quarters.
The Nordstrom family is deeply involved in running the business. The family control more than 26% of the stock; three family members — all great-grandchildren of founder John W. Nordstrom — are officers and directors.
The key to Nordstrom’s stock will be the February earnings report and whether JWN will hold above $44.49, the 52-week low. Holding above that level consistently — hopefully amid less crazy markets — will be a sign of investor confidence.
Pure speculators might like to nibble at JWN shares because they pushed higher this week, and many retail stocks, especially Macy’s, are looking stronger. For most investors, though now just isn’t the time yet to buy Nordstrom stock. But it will be soon.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
