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Becoming the Retail Leader
Posted by: Victor Selva (IP Logged)
Date: November 4, 2013 05:08PM

Brand names are very important in the world of department stores. The U.S. Department Stores sector has been experiencing fierce competition in a market that we see is dominated by larger peers such as Macy's (M). Several factors such as value, quality and marketing mix impact on this industry in a significant way. In addition, the online channel segment is gaining importance, while modifying purchasing habits.

E-Commerce Leader

Dillard´s Inc. (DDS) operates as an apparel and home furnishing retailer. The company's stores offer a selection of merchandise, including fashion apparel for women, men and children; accessories; cosmetics; and home furnishings. The company intends to improve its profitability through the elimination and replacement of certain products but also by working in its website to increase online shopping.

Penetrating Strategies


The company's focus is in markets in which it believes it can become a principal player. The firm has focused on stores with low occupancy costs and that present an opportunity to generate higher profits on less volume. Additionally, Dillard´s has made a great effort to improve and expand its website: www.dillards.com, which offers customers the convenience of online shopping which is driving the sales growth. This improvement as well as the company’s continued inventory management has helped improve operating margin.

Earnings Surprise

Regarding the financial analysis, we can highlight that in the first quarter fiscal year 2013, earnings per share (EPS) growth was 32.3%, from $1.89 per share to $2.5 per share, beating the consensus estimate. In the second quarter, earnings beat the Zacks Consensus Estimate again with a positive earnings surprise of 21.5%. The company has demonstrated a positive pattern of EPS growth over the last years and is expected that this upward trend will continue, with a fiscal year 2015 EPS of $7.96.

Valuation

In terms of valuation, the stock sells at a trailing P/E of 11x, trading at a discount compared to the industry average of 18.8x. Analysts’ expectations imply a forward P/E of 10.32. To use another metric, its price-to-book ratio of 1.89 indicates a premium versus the industry average of 1.76x and the price-to-sales ratio of 0.58x is below the industry average of 0.73x.

A Strong Brand


Nordstrom Inc. (JWN) is a company that operates as a fashion specialty retailer that provides a range of brand names and private label merchandise focused on apparel, shoes, cosmetics and accessories.

Acquisition for Growth


With emphasis on high quality merchandise and customer service, and in order to improve the online shopping, the company acquired HauteLook, which has a membership base of more than four million shoppers. The website offers limited time sales events featuring 50% to 75% discounts. The strategy also offers customers the option of buying items online and then picking them up in a store.

Store Expansion Strategy

The firm is using the Nordstrom Rack business to expand its presence in existing markets and also plans to enter in new ones. The company plans to double the number of Rack stores, reaching 230 stores by 2016. In the followings months of 2013, Nordstrom will open 14 more stores.

Its P/E multiple on a trailing-12 month basis is 15.9 and the forward P/E multiple is 14.59. The current dividend yield is 1.95%, which is considered not enough to protect the purchasing power and is below the industry median of 1.98%.

Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.

Company ROE Compared to Industry Mean (=9.1)
Dillards 17.1 Above
Nordstrom 38.4 Above
It is very important to understand this metric before investing in a high-growth company.


Final Comment


Online shopping appears to be one channel where companies try to focus in order to gain market share in 2013. I think that engaging multi-strategies is the key to gain market share in an industry where we expect consumer spending is going to increase due to the labor market improvement.

In my point of view, the strong expansion program makes Nordstrom the most attractive choice. Hedge fund gurus like Bruce Kovner and Louis Moore Bacon added this stock to their portfolios and I would advise fundamental investors to consider adding this stock to theirs as well.

Disclosure: Victor Selva holds no position in any stocks mentioned.



Guru Discussed: Bruce Kovner: Current Portfolio, Stock Picks
Stocks Discussed: DDS, JWN, M,
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