Description

Nordstrom, Inc. (together with its subsidiaries, “JWN” or the “Company”) is a luxury department store retailer, operating primarily through the Nordstrom (full price) and Nordstrom Rack (off price) chains. I recommend purchasing JWN’s stock, which is down nearly 50% over the past twelve months, dramatically underperforming department store peers and the broader retail sector over the last 1-, 3- and 5-year periods.

I am not here to argue that we are in the midst of a department store renaissance.  Indeed, with consumer confidence teetering, recession risk rising and 2021 likely marking peak earnings for many in the space, there are reasons to believe the opposite.  However, unlike several of its peers, JWN is poised to grow EBITDA in 2022 and with a comparatively well-heeled customer base, should be relatively resilient to a downturn in consumer spending.  Moreover, in the years leading up to the pandemic, JWN generally outperformed competitors and the industry on the top line, which gives me confidence that on a normalized basis, it can grow same-store sales in the low single digits.

Further, with the Nordstrom family owning ~30% of the Company and having already made an offer to buy JWN in 2018 at a substantially higher price than where it is now trading, I would not be surprised if they come back to the table.  Notably, the board rejected the family’s offer in March 2018 to take the Company private at $50 per share or ~6.3x EBITDA.  A similar multiple today on my estimated 2022 EBITDA would equate to over $42 per share or more than 85% above JWN’s current share price.

And even if the Nordstrom family does nothing, I still think that the Company is cheap on pretty much any metric.  At under 7x forward earnings at the mid-point of Company guidance and just over 4x EBITDA and a more than 20% free cash flow yield on my 2022 estimates, JWN is trading as if it is in run-off.  I think that it isn’t and therefore believe that the stock could be a double from here in the medium term.

Capital Structure

JWN’s capital structure is reproduced below.  The Company is conservatively capitalized and committed to reducing leverage so as to re-gain an investment grade rating.  Assuming that 2022 goes as planned, JWN should subsequently be in a position to prioritize shareholder distributions in the form of dividends or buy-backs.  Specifically, based on its credit agreement, if the Company re-gains investment grade status, it will have essentially unfettered ability to distribute cash to shareholders, and it is likely to resume paying a dividend in 2022.

Of additional note, JWN’s long-dated unsecured bonds could be interesting if market jitters persist.  The Company’s 5.00% notes due ’44 are down ~16 points since late November.  While they are not yieldy, they are exposed to rate risk and they are somewhat of a high yield beta instrument, it is difficult to foresee a scenario where they would actually be impaired (though during the depths of the pandemic, they dropped to the mid-60s).

Business Overview

JWN is a luxury department store chain that operates a full-price business (Nordstrom) and an off-price business (Nordstrom Rack), each of which is discussed further below.  The latter has recently struggled and was behind the Company’s underwhelming Q3 2021, which triggered a nearly 30% one-day decline in its stock in November. 

Overall, more than 40% of the Company’s net sales are digital (after peaking at more than 50% in fiscal year 2020), and historically, the Company has had a larger online presence than peers.  The concept of spinning off department store e-commerce businesses seems to be the new PropCo/OpCo in financial alchemy following the spin-off of Saks Fifth Avenue’s e-commerce business announced in March 2021.  That deal was accompanied by a $500 million equity infusion that valued the business at ~2x revenue, with subsequent reports in late 2021 suggesting that the e-commerce unit was seeking a public valuation ~3x that level.  If JWN’s digital sales were valued at 2x revenue, the Company would be worth over $12 billion from e-commerce alone.  Suffice it to say, I do not think that this valuation is plausible, and I believe that an e-commerce separation is unlikely because, as Macy’s recently highlighted, it would be dis-synergistic.  Nonetheless, I am of the view that JWN has figured out digital to a greater degree than most peers and think that e-commerce growth should de-risk the story going forward.

Nordstrom (~67% of net sales)

The Company’s Nordstrom unit consists primarily of its Nordstrom digital operations and 94 stores in the United States (it also has a small presence in Canada).  Based on estimated sales per square foot and other characteristics, I consider this business generally comparable to Bloomingdale’s (owned by Macy’s), Saks Fifth Avenue and Neiman Marcus (excluding Bergdorf Goodman, which is in a category of its own).  Many Nordstrom stores are mall-based, and the Company owns the majority of its boxes (in most cases, subject to ground leases).  As Nordstrom stores are generally in high quality locations and ~70% of its ~19 million square feet is owned, I do not think that it is unreasonable to estimate ~$0.5 billion to ~$1.5 billion of property value.  However, I also do not think that JWN’s properties alone are substantial enough to entice a financial buyer.

Nordstrom Rack (~33% of net sales)

Nordstrom Rack is JWN’s newer, lower-priced unit, with 240 stores in the United States supplemented by digital operations.  Unlike Nordstrom, Nordstrom Rack is generally off mall and meant to appeal to younger, more price-conscious buyers although there is substantial brand overlap, with 90% of the top brands sold at Nordstrom also offered at Nordstrom Rack.  Prior to the pandemic, Nordstrom Rack was comping in the mid-single digits and seen to be a driver of longer-term growth as JWN transitioned away from traditional on-mall brick-and-mortar business.  However, as noted above, Nordstrom Rack had a challenging 2021 owing in large part to supply chain and inventory challenges.  Notwithstanding these headwinds, performance in Q4 2021 was decent and the Company expects continued improvement in 2022, which I believe is reasonable.

Model

Below is a five-year operating model setting forth my projections.  I assume that after fiscal year 2022, the Company will grow revenue in the low single digits (with Nordstrom Rack outpacing Nordstrom) and moderately improve margins.  I believe that the Company will generate levered free cash flow over the next five years that is approximately equal to its current market capitalization.  I expect some of this cash to be returned to shareholders in the form of dividends beginning in fiscal year 2022 and buy-backs beginning in fiscal year 2023. 

As the above valuation statistics indicate, if my model proves anywhere close to right, JWN appears to be a substantial bargain at its current price.

Risks

There are three major risks.  First, JWN may fail to execute on its Nordstrom Rack turnaround.  Second, retail and/or department store trends may worsen.  Third, a recession or substantial downturn in consumer spending may pressure results.

Catalyst

There is no specific catalyst, but I believe that JWN will trade up if the Company delivers results that provide comfort in the achievability of its full year guidance.  Additionally, JWN will rally amid any talk of a potential take-private by the Nordstrom family or otherwise.