Nordstrom Grabs Market Share

Narrow-moat  Nordstrom (JWN) posted strong second-quarter results prompting management to raise their full-year profit outlook. Sales are now expected to fall between $15.4 and $15.5 billion (up from $15.2 to $15.4 prior, and near our $16 billion estimate) while the earnings per share forecast was raised to $3.50-$3.65 (up from $3.35-$3.55). After incorporating these results, we expect revenue to grow around 3% (slightly above the updated outlook) and EPS around $3.57. As a result, we do not anticipate to materially alter our $53 fair value given that our long-term thesis is unchanged, incorporating sales growth through the further rollout of Nordstrom Rack stores, e-commerce penetration, and rewards program expansion (sales growth of 2% and operating margins of 6% on average over the next five years).

We are encouraged by Nordstrom's ability to continue to take market share given the year-to-date 0.1% average increase in department store sales versus Nordstrom's 2.4% fiscal year-to-date increase, supporting our thesis that Nordstrom has a brand intangible asset, which underlies our narrow moat rating. We believe the modest increase in merchandise margin, which supported gross margin expansion by 91 basis points (now 35%) is further evidence that the company has modest pricing power from its brand equity, driving the net sales increase of 7% in the period. Furthermore, slightly decreasing inventory levels highlight the success and synergies Nordstrom has cultivated between their full-price and off-price segments. These segments allow the firm to quickly turn inventory while not discounting strategic brands (now 45% of full price sales) which further strengthens their relationships with brand partners.