Narrow-moat Nordstrom JWN suffered a disappointing 2021, but its fourth-quarter results exceeded our expectations, showcasing progress on key initiatives, such as improving Rack’s performance, optimizing its supply chain, and lifting its merchandise margins.
Specifically, Nordstrom’s 23.4% sales growth in the quarter eclipsed our 21.5% forecast as full-price and Rack sales growth of 23.3% and 23.5%, respectively, beat our estimates by 230 and 100 basis points. After falling short in 2021’s first half, Nordstrom’s full-price sales (69% of sales) have risen above 2019 (prepandemic) levels as its active, home, jewelry, and other categories are making up for pandemic-related weakness in upscale fashion. As for Rack (31% of sales), its efforts to raise prices, increase product selection, and invest in e-commerce appear to be bearing fruit, likely putting an end to speculation that it might be separated from Nordstrom’s full-price operations (a move we have viewed as unlikely).
Nordstrom’s fourth-quarter 38.4% gross margin beat our forecast by 230 basis points on the sales outperformance and low markdown rates, leading to a 6.8% operating margin that surpassed our 5.9% estimate. However, its selling, general, and administrative expenses were about 7% above our forecast on higher labor and shipping costs.
Turning to 2022, Nordstrom’s revenue growth and operating margin guidance ranges of 5%-7% and 5.6%-6%, respectively, are above our 3% and 4.5% estimates as demand appears to be recovering and mid-single price increases are planned. Fortunately, the firm reports that the supply chain issues that have vexed the apparel industry in recent quarters are beginning to abate.
Nordstrom’s shares rallied about 35% in post-market trading on the news, but remain well below our $41 fair value estimate, which we intend to raise by a mid-single-digit percentage on the report and a reversal of our prior expectation of a higher U.S. corporate tax rate.
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