Retail stocks have performed well over the past few weeks, as most of them have crushed earnings. There's been surplus consumer spending due to an increase in household savings, government stimulus and fears of future inflation. I believe that retail stocks will come back down to earth soon as they've outperformed by a significant amount over the past 12 months, and there are headwinds ahead such as the end of government stimulus programs and supply chain constraints. However, I believe that Nordstrom (JWN, Financial) is an exception, and here's why.
Price elasticity
Core inflation has shot up significantly this year, and it's anticipated that this trend will continue. As a result, lower-priced goods might suffer from a decrease as people are no longer able to afford to buy as many of them. However, the demand for Veblen goods - luxury items for the wealthy who will not suffer adverse affects from increases in the prices of food, housing and other necessities - will likely hold constant demand.
Nordstrom is a luxury retailer that serves a mixed customer base of the wealthier middle class and the ultra-wealthy. Much of its customer base is seeking Veblen goods, which may even see increased demand when the price increases as wealthy individuals often seek "exclusivity" and are willing to pay more for goods they see as "more exclusive."
Digital growth strategy
The company remains focused on its long-term growth strategy, which aims to capitalize on digitalization, subsequently offering a better customer experience, increased sales volume and better inventory management.
Management is focused on integrating assets and providing a more comprehensive range of products with increased delivery features. Nordstrom aims to eventually digitalize 50% of its business.
Nordstrom holds a significant amount of relative value. The company currently trades at a price-sales ratio of 0.34 and a price-to-cash-flow ratio of 5.72, both under their respective value benchmarks of 2.00 and 15.00. Furthermore, the stock trades at an enterprise value-to-Ebitda multiple of 8.51, which is 24.45% lower than its sector average.
Wall Street’s take
Wall Street analysts have on average decided on a $37 price target with a potential 28% upside for Nordstrom's stock. Jeffries set the highest price target of $48 three days ago.
Source: TipRanks
Final word
Most retail stocks have benefitted from an increase in demand for their goods over the past year, but many might suffer from future inflation, a slowdown in real GDP growth and the ending of government stimulus measures. However, Nordstrom is not part of that group due to the economic categorization of its customer base, and the stock still holds high-quality relative valuation metrics. This makes Nordstrom is a strong buy in my book!
