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Third quarter results Nordstrom: Disappointing, but equities are undervalued

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Despite Nordstrom (NYSE:JWN) reporting third quarter results that beat even low expectations, we were still disappointed. We expected a positive surprise, given that other retailers had better-than-expected results, and expectations for the company were very low. Nordstrom reported quarterly net sales of $3.4 billion, loss per share of $0.13 and adjusted earnings per share of $0.20. Looks like we weren’t the only ones disappointed with the results, as shares fell ~9% in post-market trading on Nov. 22.

When Nordstrom reported its second-quarter results, it said that customer demand had begun to wane in late June, primarily at Nordstrom Rack. Therefore, it gave a very soft forecast, which we now know came true as sales fell ~3% year-over-year. A big surprise in the quarter was that total digital sales fell 16%, though this includes a negative impact of about 300 bps of anniversary revenue. One of the reasons for the decline in digital sales was the increased number of in-store purchases by customers.

However, there was also positive news. Despite inflationary pressures, the company managed to reduce variable supply chain costs as a percentage of sales by about 100 basis points compared to last year. The other good news was that New York is doing very well, and it’s one of the best stores in terms of sales growth.

Results Q3 2022

Nordstrom reported a loss per share of $0.13 and adjusted earnings per share of $0.20 for the third quarter. Net sales declined 3%, including a negative impact of approximately 200 basis points due to the shift from one-week anniversary sales to the second quarter. Digital sales represented 34% of total sales during the quarter.

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Gross profit as a percentage of net sales declined 190 basis points due to higher markdowns on clearance products. EBIT margin was 0.1% of sales and adjusted EBIT margin was 2.1%, 145 basis points lower than last year.

Nordstrom Investor Presentation

relatively low performance

With so many retailers reporting positive news lately, investors expected better results from Nordstrom, not just meeting expectations that were already low. Nordstrom is also underperforming some competitors, such as Dillard’s (DDS), which saw total retail sales grow 8%. Even Macy’s (M) beat expectations in its most recent quarter, even though sales fell 3.9% year over year.

stock

Nordstrom is working to clean up its inventory, which could lead to a lower markdown rate in 2023, and could result in a tailwind for gross margin next year. Management was asked about excess inventory during the earnings call, and specifically how much still needs to be cleared in the fourth quarter. Chief Accounting Officer and soon-to-be interim CFO Michael Maher had this to say:

[…] On the inventory side, we said at the end of the last quarter that we expect to take about $200 million in incremental write-downs in the second half of the year, roughly evenly split between the third and fourth quarters, and we expect it to schedule is located. We therefore still expect to close the year with a healthy and up-to-date stock position.

balance

Nordstrom improves his balance. It ended the third quarter with $993 million in available liquidity, including $293 million in cash. It also reported that it had repaid $100 million it borrowed on its revolving line of credit, and once again has the full balance available. It also reaffirmed its commitment to an investment-grade credit rating and expects to lower the leverage ratio to less than 2.9x by the end of 2022. Nordstrom continues to aim for a leverage ratio of less than 2.5x.

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Advice

There were no major surprises with the guidance, and the company reaffirmed its previous financial outlook for 2022. For fiscal 2022, it expects revenue growth of 5% to 7% over 2021, with an adjusted EBIT margin of approximately 4.3 % to 4.7% for the full year. This should result in adjusted earnings per share of $2.30 to $2.60.

Evaluation

That’s hard to judge given the volatility of Nordstrom’s earnings. Nevertheless, we also believe in using conservative assumptions that equities are undervalued. The company has a very low price/sell ratio of ~0.24x, price/earnings ratio of ~8.9x, and trades at approximately 6.9x cash flow. Based on the most recent quarterly dividend of $0.19, shares are yielding just under 4%, which we consider attractive. Higher valuation multiples are hard to justify with declining net sales, but if the company starts to grow sales at a healthy pace again, we think it could easily justify a price-to-sales ratio of 0.5x, which equates to ~ $40 per share.

Data by YCharts

Analysts do not expect major earnings growth in the coming years. We are a little more optimistic and think the company has a good chance of beating these lower expectations.

looking for alpha

risk

We continue to view Nordstrom as an above-average risk investment given the volatility of earnings and the low Altman Z-score, which remains below the critical 3.0 threshold despite some improvements. The company also has a very significant percentage of unsold shares outstanding.

looking for alpha

conclusion

While we were disappointed with the Q3 results Nordstrom reported, they were essentially in line with what the company had previously led. It wasn’t all bad news, though, as the company appears to be on track to clear its inventory and head into fiscal 2023 in better shape. It’s also made significant improvements to its supply chain, which should help improve margins. We believe the stock is substantially undervalued, even though we consider Nordstrom an above-average risk investment. Despite our disappointment, we maintain our ‘Buy’ rating on the stock, mainly due to the low valuations at which the stock is currently trading.

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