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Nordstrom: Definitely a Good Buy

August 18, 2014 | About:
ovenerio

ovenerio

5 followers

In this article, let's take a look at Nordstrom Inc. (JWN), a $12.37 billion market cap company, a specialty retailer of apparel and accessories, which operates some 260 stores in 35 states.

A leader

The company is a leader operator in the department store business and is characterized by having a fast inventory turnover and high returns on capital.

It is known for its emphasis on service, having high quality products and great fashion. The firm focuses on apparel, footwear and fashion accessories – businesses with higher margins.

The company must increase its online sales so it is investing heavily in its online capabilities. One competitive advantage of this retailer is the merchandising strategy. It would be very convenient to apply it to the online channel as well.

International expansion

The company plans to enter strategic countries, such as Canada. It is planning to open 15 to 20 full-line stores, and the first ones are planned for this year. In the future it will not be surprising that Nordstrom will operate more full-line stores in the U.S. as well.

Multi-channel strategy

With 117 Nordstrom full-line stores, the online store (www.nordstrom.com) and 142 off-price Nordstrom Rack stores as of March 2014, the company offers a great business environment. It plans to increase Rack doors to 230 by 2016.

Price elasticity

The end customers are less sensitive to prices, which means the products are inelastic if a large change in price is accompanied by a small amount of change in quantity demanded. Customers make purchases based on fashion or past experience.

Revenues, margins and profitability

Looking at profitability, revenue growth by 6.62% did not lead earnings per share increase in the most recent quarter compared to the same quarter a year ago ($0.72 vs $0.73). During the past fiscal year, the retailer increased its bottom line by earning $3.72 versus $3.56 in the prior year. This year, Wall Street expects an improvement in earnings ($3.90 versus $3.72).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

JWN

Nordstrom

35.29

DDS

Dillards Inc.

16.25

BIG

Big Lots Inc.

13.9

 

Industry Median

9.14

The company has a current ROE of 35.29% which is higher than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking for those levels or more, Nordstrom is a very good option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408364022347.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.5x, trading at a discount compared to an average of 22.3x for the industry. To use another metric, its price-to-book ratio of 6.1x indicates a premium versus the industry average of 1.92x while the price-to-sales ratio of 1.0x is above the industry average of 0.79x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $28,882, which represents a 23.6% compound annual growth rate (CAGR).

1408363971816.png

Final comment

As outlined in the article, Nordstrom's top businesses, which include quality and excellent service, are the key drivers of the company. Additionally, the opening of new stores, while focusing on online sales as well, makes a good multi-channel strategy.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Ray Dalio (Trades, Portfolio) or the fund Manning & Napier Advisors, Inc. added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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