Description

Investment Thesis 

Nordstrom is currently trading at a P/E multiple of 12, and its market value has nearly halved over the past five years. However, there are three catalysts within the next 12 months that could lead to an improved valuation for the company.

1. Nordstrom is in discretionary consumer spending category and suffers from the muted consumer spending environment since Fed hiked the interest rates. Now the inflation has come down significantly in 2024, and inflection point has come for the consumer environment to flip. After Nordstrom returns to growth (comparing to 2019), its multiple could naturally expand to historic level of 15, representing a 25% upside. 
2. Nordstrom recently launched a digital marketplace on its ecommerce platform and changed its inventory strategy of focus on the brands matters most to their customers. These are great internal changes that could churn out organic changes in the future.
3. Nordstrom family is currently exploring a go-private deal for the company. Any progress on this front will quickly unlock values for the shareholders.  

Nordstrom’s Recent Financial Performance  

Since the onset of COVID-19, Nordstrom has faced significant challenges in its operating environment. In 2020, the company had to cancel orders and liquidate existing inventory. In 2021, it encountered supply chain issues that made it difficult to restock its stores. By 2022, like many in the industry, Nordstrom overbuilt its inventory in response to rising demand just when the Federal Reserve began increasing interest rates. This excess inventory from 2022 necessitated a clearance effort in 2023, coinciding with muted consumer spending.

However, we are seeing light at the end of the tunnel from Nordstrom’s FY2024Q1 result. Its revenue reached $3,221 million, a decline of only 3.8% compared to $3.349 billion in FY2019 Q1. Notably, Nordstrom closed 13 stores in Canada in 2023. Excluding the impact of these closures, the company’s top-line performance is now very close to its 2019 levels.

Its gross margin is at 31.6% vs 33.5% in 2019, and SGA is 35.8% vs 34% in 2019. Company cited “timing matters related to both higher loyalty activity and reserves, external theft in the Company's transportation network and inventory cleanup in the Company's supply chain as facilities are consolidated.”. We will see more evidence on the gross margin expansion when company reports earnings in Q2. It’s SGA% has been up slowly in the last decade because of its ecommerce business and management acknowledged that there is little room to improve this metric.

Positive Consumer Spending Environment is Coming for Nordstorm

On June 12,  2024, Labor Department reported the consumer price index, or CPI, rose 3.3% year-over-year in May, down from a 3.4% gain in April and below economist estimates of a 3.4% gain. Fed has been monitoring the inflation closely and its goal is to bring inflation down to its long-term target of just 2%. Fed has stopped raising interests rates this year and if the inflation keeps cooling down throughout this year,  we are very likely to see an interest cut.

Higher interest rates make borrowing hard for consumers and creates a muted spending environment for retailers like Nordstrom, who mainly sells discretionary items and is operated in an industry where it has little pricing power over consumers.

When the rate cut starts, we are expecting to see an improved consumer spending environment, which provide a tailwind for Nordstrom’s sale growth.

New strategy and digital Marketplace lays the foundation for future growth

On top of the soon-to-improved consumer spending environment, there are internal changes at Nordstrom that present additional growth opportunities. These changes mainly represent the profitable growth strategy Nordstrom is pursuing. For example, it has closed all Nordstrom stores in Canada and wind down the Nordstrom trunk business, citing unable to churn out profits from these business. One of the most exciting changes happening at Nordstrom is the launch of digital marketplace on April this year.

Below is from Nordstrom’s own announcement:

"Nordstrom’s digital marketplace represents one way we are expanding our online assortment beyond traditional wholesale partnerships. This unowned inventory model allows us to offer the full expression of our best brands and expands the depth of products and sizes we offer to our customers. Nordstrom.com is our largest flagship store and gives us the opportunity to offer new and existing customers more choices for more occasions. Our goal isn’t to be the everything store, but to offer customers more breadth, depth and newness in the categories that they come to us for, from some of the most coveted brands in the market.” 

Nordstrom itself represents a distribution channel for high-quality brands but it has operated itself mostly as a whole-sale retailer in the past. And Nordstrom’s financial performance is dependent on the productivity of its inventory, so it’s always volatile.

The digital market place is opening up its distribution channel for its brand partners, where Nordstrom doesn’t own the inventory. There is no risk in unproductive inventory but wins for both brand partner and consumers.

Apart from this exciting changes, Nordstrom also changes its inventory strategy to focus on brands matters most to their customers. In the past, Nordstrom has pursued inventories trying to chase after young customers and in the meantime lost focus on its existing customer. The result, young customers are very fickle and sometimes can’t afford at Nordstrom, its existing customer base find less and less appealing inventories. By turning the focus to the brands matters most to their customers, Nordstrom is surely finding its way back. Nordstrom Rack brand is now churning out double digit growth rate (its net sale increased 14% YOY in FY2024Q1). We have yet to see the full impact of these changes when the consumer spending environment changes.

Nordstrom family is exploring go-private deal

On April this year, Nordstrom family notified the board that they are interested to take the business private again.  The Nordstroms family tried to take the company private in 2017,  offered $50 a share or $8.4 billion. But this offer was rejected by the board, citing the offer is too low. We are still waiting for more updates in regard with this and this will be the shortest catalyst for the stock price jump.

Valuation

Nordstrom anticipates its FY2024 earnings per share (EPS) to fall within the range of $1.65 to $2.05, and the current stock price is reasonably valued based on this EPS. However, for FY2025, considering the positive internal changes and improvements in the consumer environment, we believe that an EPS of $2.05 will be the lower end of the guidance. Using a P/E multiple of 15, this would translate to a stock price of $30, representing a potential upside of 50%.

Catalyst

1. Nordstrom is in discretionary consumer spending category and suffers from the muted consumer spending environment since Fed hiked the interest rates. Now the inflation has come down significantly in 2024, and inflection point has come for the consumer environment to flip. After Nordstrom returns to growth (comparing to 2019), its multiple could naturally expand to historic level of 15, representing a 25% upside. 
2. Nordstrom recently launched a digital marketplace on its ecommerce platform and changed its inventory strategy of focus on the brands matters most to their customers. These are great internal changes that could churn out organic changes in the future.
3. Nordstrom family is currently exploring a go-private deal for the company. Any progress on this front will quickly unlock values for the shareholders.