Since mid-May, Nordstrom (NYSE:JWN) has staged a nice rally, with the shares going from $45 to $53. But this has not been an isolated case: Wall Street has been pouring money into the retail sector, as seen with the strength of companies like Macy’s (NYSE:M), Target (NYSE:TGT) and Kohl’s (NYSE:KSS).
So what now for JWN stock? Can the good times continue?
Well, I think so. Whenever investors get interested in a segment of the market, the trend usually is more than a short-term blip. For the most part, it’s part of the process of getting valuations more in-line with reality.
Keep in mind that — even after the recent run-up in JWN stock — the forward price-to-earnings ratio is still a reasonable 14.6X. The dividend is also a decent 3%.
But perhaps the most important part of the story of JWN stock is the company’s focus on reinventing itself. To this end, the company has introduced more than 100 new offerings for plus-size customers. It’s also important to note that they are not part of a separate department. In fact, Nordstrom is even using plus-size mannequins (the standard size is actually 2!) Consider that an American woman — who is 20 years or older — has an average waste of 38 inches.
Oh, and Nordstrom has plans to take a similar approach to the men’s department. Although, the changes will not be made until next year.
But of course, when it comes to JWN stock, the major changes are focused on technologies and innovations, so as to fend off e-commerce operators like Amazon (NASDAQ:AMZN). Back in early March, the company agreed to buy two startups, which should help boost the company’s digital efforts. One was for BevyUp, a platform for providing omnichannel experiences. As for the other acquisition, it was for MessageYes. The company allows people to use their smartphones to find new products by leveraging artificial intelligence (AI), human-assisted AI and integrated payments.
But even before these actions, JWN has been getting lots of traction with its own in-house technology investments. During the latest quarter, digitally enabled sales accounted for 29% of total sales, up 25% on a year-over-year basis. According to digitalcommerce360, internet sales are estimated to have increased by 16% to roughly $1 billion during the past year.
Bottom Line on JWN Stock
Now it’s true that JWN stock still has its issues. No doubt, the e-commerce mega wave is a challenge, that has put a dent into mall traffic. But JWN must deal with the potential cannibalization of its business because of the Nordstrom Rack business. What’s more, there are potential risks with the expansion into Canada.
Yet JWN does have some powerful advantages as well. The company has a premium brand, which helps insulate itself from the competition. And yes, the obsessiveness with customer service is another critical factor. Let’s face it, this is something that keeps people coming back to the stores.
The overall business of JWN remains fairly healthy too. In the latest quarter, the company’s sales grew by 6.2% to $3.56 billion and profits came to $87 million, or 51 cents a share, compared to $63 million, or 37 cents a share in the same period a year ago.
According to UBS Group’s Jay Sole, the threat of Amazon to JWN is overblown. Actually, he believes that the company will continue to eat into market share from rivals. As a result, he has a “buy” recommendation on JWN, with a price target of $69, which implies 26% upside.
So while it may seem dicey right now to buy a retailer — especially in light of the grim headlines — the fact is that sentiment is starting to get bullish again. And for the most part, JWN does look like a pretty good choice, in terms of growth, technology and valuation.
Tom Taulli is 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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