Nordstrom Earnings: Signs of Progress on Plans Despite Challenging Quarter; Shares Very Undervalued

Narrow-moat Nordstrom JWN had progress on its strategic initiatives in 2023′s first quarter, despite uneven consumer spending and a write-down related to the shutdown of its Canadian operations. As the firm held to its 2023 outlook for a 4%-6% sales decline, an adjusted operating margin of 3.7%-4.2%, and adjusted EPS of $1.80-$2.00, we do not expect to make any material change to our $40 per share fair value estimate.

Nordstrom’s shares edged up 7% in postmarket trading, but we still view them as very undervalued. In the long run, we forecast the firm can achieve 6% operating margins on 2% annual sales growth as it implements its pricing, inventory control, merchandising, and supply chain initiatives. It currently offers a dividend yield of nearly 5% (which we think is secure).

In the quarter, Nordstrom’s sales fell 12%, below our estimated 11% decline, as it faced a tough comparison and was affected by the wind-down of the Canada business. However, its gross margin on net sales was 33.8%, a 110-basis-point improvement from last year and 270 basis points above our estimate. We view this result as a sign that its efforts to lower its inventory (down 8% from last year), turn its merchandise more quickly, and increase full-price selling are working.

By banner, Rack (34% of sales) suffered an 11% sales decline, but management believes that efforts to stock more premium merchandise are paying off. Meanwhile, sales fell 10% at the full-price operation (66% of sales) because of the Canada shutdown and lower spending by wealthier consumers.

Excluding the write-down, Nordstrom posted a modest1.6% adjusted operating margin and $0.07 in EPS, beating our estimates of 0.2% and negative $0.13, respectively. The firm will face easier comparisons in the second half of 2023, as well as benefit from its typical midyear anniversary sale. We forecast it will return to sales growth and show demonstrable operating margin improvement in the third quarter and holiday season.