Nordstrom Sets the Department-Store Bar
The narrow-moat firm is the best-positioned department store in our coverage, as it capitalizes on its full- and off-price models.
Narrow-moat Nordstrom (JWN) posted first-quarter results that tracked within our estimates, prompting us to maintain our $53 fair value estimate. Following the high-single-digit stock price decline on the news, we see shares as offering moderate upside for investors. Total sales grew 5% (including a 250-basis-point benefit from a loyalty event shift), driven by comparable-sales growth of 0.6% that together keep the firm on track to hit our near 2% full-year top-line estimate. Comparable-sales growth at the Nordstrom brand (67% of sales) came in at 0.7%, while comparable growth at the Nordstrom Rack brand (31% of sales) was 0.4%. Included in these results were digital sales, which increased 18% this quarter versus our 8% estimate (now accounting for 29% of total sales, up from 26% last year). We posit that this shows increased customer engagement and demonstrates that the firm can offer complementary brick-and-mortar stores without subsequent cannibalization, supporting its brand equity. Further, we think these results support our belief that Nordstrom is the best-positioned department store in our coverage, as it capitalizes on its full- and off-price models.
Despite ongoing growth investments in its supply chain, technology, and marketing (which we think support its top-line growth), the firm saw its operating margins fall a mere 20 basis points to 4.4%, related to higher occupancy costs and pre-opening expenses that should subside. In addition, our model assumes Nordstrom continues to invest to prompt growth, but at a rate moderately lower than historical levels; this assumption remains intact after these results. As such, we don’t see a material change to our 6% average operating margin estimate over the next 10 years (from our current fiscal 2018 estimate of 5.7%), which is driven by near flat gross margins of 36% on average and nearly 30 basis points of benefit to its selling, general, and administrative expenses to average 30%.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.