Nordstrom’s sales growth has been weak, with -5.1% net sales in Q2 2019.
While Nordstrom expects improvements from the changes to merchandise assortment and promotional strategies, second-half sales are still expected to be flat.
Nordstrom’s bottom line performance has been strong though, with cost reductions and well managed inventory helping to counteract much of the effect of the sales weakness.
Tariffs may have more effect on 2020 results.
Nordstrom’s value looks solid at $28 to $29 despite some issues with sales and tariffs.
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Nordstrom (JWN) benefited from low expectations, as its stock went up 16% after its Q2 2019 earnings report. Nordstrom’s sales outlook still looks sluggish, with Q2 2019 sales a bit lower than expected and second-half sales trends improved from the first half but still expected to be around flat year-over-year. Nordstrom did perform well on the bottom line, though, with strong discipline around expenses and a well-managed inventory situation allowing it to exceed gross margin expectations.
The expense and gross margin performance has offset much of Nordstrom’s sales shortfall and allowed it to largely maintain its 2019 earnings guidance, albeit with a lower top end of its guidance range.
Sales Growth Remains Sluggish For Now
Nordstrom’s sales growth continued to be weak in Q2 2019, although it had previously indicated that it would take some time to see sales growth improvements as it adjusted its merchandise offerings and fixed issues related to its Nordy Club rollout. During its Q1 2019 earnings call, Nordstrom expected second-quarter sales to be similar to first-quarter sales, with gradual improvements to trends seen in the second half of the year.
Nordstrom ended up reporting -5.1% net sales in Q2 2019 after -3.5% in Q1 2019. This has resulted in it modifying its full-year outlook to -2% net sales from its previous guidance of -2% to flat net sales. This implies an expectation for roughly flat net sales during the second half of the year, which appears to be around 1% less than it previously expected.
An ongoing challenge for Nordstrom (and other department stores) is the decline in brick and mortar sales, with flat net sales implying that brick and mortar sales may be down around 3%. This tends to put pressure on gross margins.
Good Bottom Line Performance
Despite the negative revision to sales guidance (of 1% at guidance midpoint), Nordstrom’s earnings guidance was only modestly revised downwards at guidance midpoint, while the low end of its guidance range was kept the same. Nordstrom mentioned that it exited Q2 2019 in a favorable inventory position (down -6.5% compared to last year) despite sluggish sales, which should position it for solid gross margins during the remainder of the year.
Nordstrom’s gross margins ended up around 0.2% higher in Q2 2019 compared to consensus, and it also noted that it had delivered expense savings of over $100 million to date, putting on pace to exceed its plan for $150 million to $200 million in savings. Nordstrom mentioned that the savings came from various initiatives to improve efficiency in its supply chain and support structure (among various areas). These are considered permanent reductions to its cost structure.
Valuation
Nordstrom now expects to generate approximately $830 million EBIT at its guidance midpoint, which means that it would generate around $1.5 billion EBITDA. At $28.57 per share, Nordstrom’s is now only valued at around 4.1x EBITDA. A 5.5x EV/EBITDA multiple (which is still a bit below its historical multiples) would value it at around $42 per share instead.
There is some risk that Nordstrom’s 2020 results will be weaker if the trade war continues to escalate. Nordstrom’s 2019 guidance didn’t include the impact of the 10% List 4 tariffs, although it mentioned that the effect was expected to be minimal in 2019. The additional 5% tariff rate on those products plus a potential full year of impact would have a more noticeable impact on its results.
Nordstrom didn’t repurchase any shares in Q2 2019 as it made a large amount of repurchases in Q1 2019 and doesn’t have the capacity to make further repurchases at the moment without increasing its debt. In 2020, it may be able to do more share repurchases as its capex budget is likely to be significantly lower after its New York flagship store opens this Fall.
Conclusion
Nordstrom’s sales results continued to be weak in Q2 2019, although that was largely expected. The second half of 2019 should be better, although Nordstrom did tweak its expectations downwards a bit and now only expects flat sales in the second half.
Nordstrom has made significant progress in terms of expense reduction and has managed its inventory well, leading to good bottom-line performance despite its sales challenges.
Nordstrom’s more efficient cost structure should put it in a good position, assuming that it can stabilise its sales. At $28 to $29 per share, Nordstrom appears to be a solid value despite ongoing gross margin pressure. There is the potential for the trade war to weigh on Nordstrom’s results next year, as it becomes harder to mitigate the effects of increasing tariff rates. Nordstrom should be decently positioned to weather a trade war, though, as upscale consumers are less sensitive to price increases.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JWN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
