In the past, I have focused on few stocks that are focused on the consumption sector. I am of the opinion that discretionary and nondiscretionary consumption will continue to be a key growth driver in the U.S. In particular, the festive season is likely to add to robust sales growth for retailers, and I see this year as slightly different due to lower oil and gas prices. Disposable income is relatively higher for consumers this year, and there can be potential surprises related to consumption growth.
Nordstrom (JWN, Financial) is a fashion specialty retailer that offers apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. As of December, the company operated 323 stores in 39 states in addition to the company’s ecommerce sales platform.
From a stock price perspective, Nordstrom is currently trading near 52-week lows with the stock having declined by 36% year to date. These are very attractive levels for some exposure to the stock and the company’s valuations support that.
Nordstrom is trading at TTM PE of 14.5 and TTM EV/EBITDA of 6.3. In addition, the stock is trading at forward PE (January 2017) of 13.8 and price to sales of 0.66. I must add here that Nordstrom pays $1.48 in annualized dividend, and this translates into dividend yield of 2.9% at current stock price of $50.6. Clearly, the valuations are attractive.
Coming to the business growth and future expectations, Nordstrom has reported sales growth of 5% (full-price sales) and growth of 19% (off-price sales) during the period 2010-2015E. Therefore, the strong sales growth momentum has sustained and underscores the quality of the company’s offering. Further, Nordstrom expects full price sales growth to be in mid-single digits for 2015 to 2020 with off-price sales growth expected at low-double digits. With nearly 80% of the company’s sales coming from full-price sales, sales growth CAGR should be anywhere between 4% and 7% for the next five years.
An important point to note here is that the company’s ecommerce sales are likely to trend higher in the next five years, and that is likely to translate into continued margin expansion. By 2020, the company expects 25% of its sales to come from the ecommerce platform.
From a capital expenditure perspective, Nordstrom expects to moderate investments after 2015, and there are several positives in this decision. First, higher free cash flow will be available for allocation toward dividends and share repurchase. Second, the focus will be on sweating existing stores and increasing the returns per store instead of aggressive expanding stores.
The stock correction is overdone in the near term, and this is a good opportunity to consider exposure to Nordstrom. In the foreseeable future, strong 4Q and 1Q results will drive stock upside. In the long term, stable growth, higher free cash flow and higher dividend payout will drive stock upside. Considering current valuations, the stock can deliver robust returns in 2016 among retail names.
