We have maintained our long-term Neutral recommendation on upscale department store operator, Nordstrom Inc. (JWN) with a target price of $63.00, following its weaker-than-expected first-quarter 2013 results, offset by its ongoing efforts to boost top-line growth by relentless focus on expanding its stores network.
Why the Reiteration?
Nordstrom is one of the leading players in the extremely fragmented specialty retail sector. The company offers a broad array of over 500 brands, targeted toward the whole family, through a strong nationwide network of more than 240 stores situated across 31 states. Nordstrom through its globally recognized brands caters primarily to the upscale segment, enabling it to generate high margin revenue. Nordstrom also appeals to its consumers by offering a more inclusive selection of quality merchandise, which further distinguishes it from other mall-based department store retailers.
We believe Nordstrom’s sustained focus on expanding its store network along with enhancing online sales and consumer retention strategies will boost its top line and profitability. Nordstrom is poised to continue its store expansion strategy in the years ahead, targeting to double the number of Rack stores to more than 230 by 2016, with roughly 24 openings in 2013 and more than 30 in 2014. Currently, the company is left with 14 more Rack openings over the rest of 2013.
Additionally, the company has been actively implementing strategies to improve its merchandise offerings, develop IT infrastructure to enhance customer’s web and mobile experience, implement an enterprise-wide inventory management system and increase relevance with existing and new customers.
On the flip side, the company posted weaker-than-expected results in the recently concluded quarter with sales and earnings coming below the Zacks Consensus Estimate. The company’s results suffered mainly due to weakened sales trends in seasonal merchandise and several geographic markets. However, the company’s robust performance at the company's stores as well as prudent inventory and expense management compensated well for the loss of sales volumes, enabling sales and earnings to rise year over year.
The sluggishness in the recent quarter results has caused the company to slightly trim its sales and comps forecasts, hurting investor sentiment for the near term. Moreover, we remain slightly cautious on the company’s growth prospects due to the slow economic recovery, intense competition and exposure to seasonal fluctuations.
Other Stocks to Consider
Shares of Nordstrom currently carry a Zacks Rank #4 (Sell). Until any further upward revision in Nordstrom’s Zacks Rank, other stocks in the apparel/shoe space that are worth considering include New York & Company Inc. (NWY), which has a Zacks Rank #1 (Strong Buy), Pacific Sunwear of California Inc. (PSUN) and Gap Inc. (GPS), both of which carry a Zacks Rank #2 (Buy).
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