The last year has been challenging for Nordstrom (NYSE:JWN) stock. The stock declined by 50% during this period to lows of $25. However, there has been a pull-back rally with the stock trading higher by 25% at $31.50.
Before talking about the positives, I would like to mention that JWN has not been singled-out for punishment. The departmental store stocks have suffered amidst decline in sales. Peers J.C. Penney (NYSE:JCP) is lower by 52%, Kohl’s Corporation (NYSE:KSS) is lower by 40% and Macy’s (NYSE:M) is lower by 54%.
I am of the opinion that the worst might be over for JWN stock. Let’s discuss the fundamental factors that support this view.
The United States and China are slated to resume trade talks in October. It might be too early to assume that one round of talks will solve the trade war. However, it’s likely that both countries move towards a resolution as the trade war is taking a toll on economic growth.
Any positive development will trigger upside for Nordstrom stock with the company having manufacturing exposure to China.
Another key point to note is that the U.S. GDP growth is primarily consumption-driven. Even with the manufacturing sector recession, consumer confidence remains robust.
As the Federal Reserve pursues expansionary monetary policy, I believe that consumption will remain strong. Therefore, even in a weak economic scenario, I don’t see major concerns for Nordstrom stock in terms of any sharp decline in sales.
It is important to note that according to the company, 65% of JWN customers have household income in excess of $100,000. With a high income target market, sales might be relatively immune to recession fears.
Change is the only constant and this applies to departmental stores in the United States. Maintaining status-quo in a rapidly evolving market environment would translate into demise of the brand.
Nordstrom has been in-sync with changes in the retail market and I believe that this will allow the company to survive and grow.
To put things into perspective, the future of retail is omni-channel retailing. Without integrating different sales platforms, it might be difficult for any retailer to survive. On that front, Nordstrom has the following positives:
First, the company’s digital sales have increased from $3.5 billion in FY16 to $4.6 billion in FY18. With 15% year-over-year growth in digital sales during this period, the company has been building a strong online presence. This is critical for the company to remain competitive in the future.
Second, the company has already started opening ‘local’ mini stores and I believe that this can impact earnings positively. Besides serving as a pick-up point for online sales, these stores will increase consumer engagement. The idea is to offer personal styling and alteration services, which can potentially boost sales.
Nordstrom wants to provide consumers with different buying channels, ease of pick-up and value added services. JWN has a loyal customer base and these initiatives will help in retaining and expanding the consumer base.
For the first half of 2019, Nordstrom reported operating cash flow of $692 million and a capital expenditure of $480 million for the same period. Positive free cash flows enable steady dividends and shareholder value creation through share repurchases.
In addition, JWN expects capital expenditure to moderate to 3%-4% of sales in 2020 from FY19 levels of 6% of sales. This would imply higher free cash flows in 2020 and potentially beyond.
JWN also expects to reduce SG&A in the coming years and that will translate into EBITDA margin expansion. Higher EBITDA margin will also be supported by focus on full-price sales. The point I am making is that Nordstrom is positioned to accelerate operating cash flow and free cash flows through these moves.
Overall, Nordstrom might be navigating challenging times in terms of sales growth. However, the company is unlikely to face any balance sheet stress.
There is no doubt that departmental stores in the United States have faced challenging times. However, Nordstrom will survive through swift changes in selling strategy and move towards building a strong Omni-channel retail presence.
The company’s stock has taken a beating in the last 12 months and the recent upside in JWN stock might indicate a reversal in the downtrend. If there is a resolution to the trade war, Nordstrom stock will find another upside trigger.
In conclusion, current levels are attractive for medium to long-term exposure and I believe that Nordstrom has reinvented itself to survive in the current retail environment.