5 Big Reasons You Should Buy the Dip in Nordstrom Stock

Nordstrom stock has been a loser for a decade, but that could change soon

It has been a rough run for shares of mall retail giant Nordstrom (NYSE:JWN). Over the past decade, as ecommerce has entirely disrupted brick-and-mortar retail, Nordstrom’s market share, revenues, margins, and profits have all dropped big. So has Nordstrom stock.

5 Big Reasons You Should Buy the Dip in Nordstrom Stock
Source: Jonathan Weiss / Shutterstock.com

It’s down 2% over the past decade versus a 180% gain for the S&P 500 and presently trades 65% off its ten-year highs. In other words, JWN stock has been a secular loser for the past decade.

Many expect Nordstrom’s secular downtrend to persist for the next decade, too. Nordstrom is caught on the wrong side of a secular pivot into ecommerce, bears argue, and so revenues and profits will continue to drop over the next several years as shoppers leave Nordstrom stores in favor of online shopping channels like Amazon (NASDAQ:AMZN).

They argue that, so long as profits keep dropping, it doesn’t matter how “cheap” JWN stock gets – the stock will keep falling so long as earnings keep falling. To that extent, I agree. Nordstrom stock won’t bottom until its earnings bottom.

But that’s where my agreement with the bear camp ends. Instead, I think JWN stock is actually a compelling buy at current levels for five big reasons. Those 5 reasons are as follows.

1. Nordstrom Stock Is Dirt Cheap

The first big reason I like Nordstrom at these decade lows is that the stock is dirt cheap.

Over the past five years, JWN stock has averaged a 16-times forward earnings multiple. Today, JWN stock trades at 8.6-times forward earnings. That’s a near 50% discount to this stock’s five-year average valuation. Further, the consumer discretionary sector trades around 16-times forward earnings. So does the apparel retail category.

Net net, JWN stock trades at a huge, near 50% discount to its “average” valuation, the consumer discretionary sector valuation, and the apparel retail sector valuation. This huge discount across the board means that the stock could fly in the event things get better – and they will.

2. The Company Dominates an Apparel Niche

The second big reason I like JWN stock is that I view Nordstrom as a retail survivor, given its dominance in the high-end apparel retail and luxury goods niche.

A big problem with the retail category is that a lot of brick-and-mortar players simply blend together – that is, nothing distinguishes them besides price and convenience. Thus, when Amazon comes knocking with lower prices and high convenience, they will steal customers, and those indistinguishable brick-and-mortar retailers will head for the graveyard. See Sears.

Nordstrom isn’t in that boat. This company is very distinguished in the brick-and-mortar retail scene as the dominant high-end apparel retail and luxury goods department store player. Consumers won’t run away in droves because Amazon has lower prices and higher convenience.

Instead, consumers will mostly stick with Nordstrom in the long run because Nordstrom has a unique and compelling product portfolio and customer experience which they can’t find elsewhere.

As such, at the end of the day, I think Nordstrom will survive this retail carnage.

3. Nordstrom Is Supported by Strong Customer Loyalty

The third big reason I like Nordstrom is, going along with the second point, a majority of this company’s business is driven by loyal shoppers who aren’t flocking to Amazon.

Nordstrom’s loyalty program is 12 million members large. It’s also growing, up 12% year-over-year last quarter. Most important, those 12 million and growing members drove 64% of Nordstrom’s second-quarter sales. That’s up from 56% in 2018, and just 27% a decade ago.

Thus, Nordstrom has a huge and growing loyal shopper base which drives more than half of this company’s sales. Because of this, I don’t think that Nordstrom will be wiped out by ecommerce alternatives anytime soon, and I further think that sales have the potential to stabilize and even grow over the next few years.

4. New Growth Drivers Are the Right Growth Drivers

The fourth big reason I like Nordstrom stock is that management is taking all the right steps to stabilize and eventually improve the currently depressed revenue and profit trends.

Specifically, management is doubling down on two things: data-driven decision making, and omnichannel expansion.

On the data-driven side, on the Q2 conference call management discussed how they are leveraging customer feedback to improve inventory positioning and optimize promotions. Thus, the company’s day-to-day decision making is becoming “smarter”, producing decisions that more closely align with the company’s loyal shopper base. This should ultimately improve the company’s revenue and margin trends.

On the omnichannel front, Nordstrom is realizing that combining digital with physical is the future of retail. As such, they are launching Nordstrom Local stores. These will be small, inventory-free stores that are simply used for consumers to pick-up their online Nordstrom.com orders.

These new store formats are working. Local customers spent 2.5-times more on average than non-local customers. Nordstrom just started testing the Local concept in Los Angeles. It will soon expand to all other important metro areas, and as it does, it will provide a multi-year lift to revenues and profits.

Overall, then, Nordstrom’s next-gen growth drivers in data and omnichannel imply that sales and profits could turn a corner over the next few years.

5. Earnings Will Bottom… Soon

The fifth and final big reason I like JWN stock here is that I see profits bottoming in 2019, and returning to growth in 2020 and after.

This belief is based on the idea that Nordstrom is finally figuring out how to grow wallet share among its huge, loyal shopper base, through leveraging data-driven decision making to tailor the business to its highest-paying customers. In so doing, demand will grow, inventories will shrink, promotions will become less frequent, and gross margins will improve.

At the same time, Nordstrom will leverage its Local expansion to grow market share in its important metro markets. That will provide a lift to revenues, which will come at the same time that SG&A dollars are dropping due to cost-saving measures. Thus, renewed revenue growth over the next few years should drive positive operating leverage.

All that implies positive EPS growth over the next few years. I’m not alone in thinking this. The consensus Wall Street estimates for EPS over the next three years are $3.30, $3.35, and $3.43 – in that order, implying gradual profit growth over the next few years.

As earnings bounce back over the new few years, so should depressed JWN stock.

Bottom Line on Nordstrom Stock

Mall retail stocks are a tough buy right now. Everyone is writing them off as secular losers in the pivot into ecommerce.

But, Nordstrom shouldn’t be written off. With a unique and differentiated value prop, a huge and growing loyal shopper base, and smart, new growth initiatives in the pipeline, Nordstrom appears ready to buck the mall retail trend and report positive revenue and profit growth over the next few years.

As the company does, those favorable trends will converge on a depressed valuation and ultimately result in Nordstrom stock soaring from today’s lows.

As of this writing, Luke Lango was long JWN and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/5-big-reasons-buy-the-dip-nordstrom-stock/.

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