Has Nordstrom Been Excessively Beaten Down?
- By Stepan Lavrouk
Shares of Nordstrom (JWN) have taken quite a beating over the last six months. The stock is down 54% from its November 2018 highs, due mostly to weak earnings results and revised sales guidance. Has the market overreacted, and could there still be value in this company?
Sales have badly slumped
The first thing that jumps off the page when reading Nordstrom's recent financial statements is how badly the company has performed with regards to sales. In the first quarter of 2019, sales fell 3.5%, which translated to a miss on earnings per share (EPS came in at $0.23, underperforming expectations by $0.21) and revenue ($3.44 billion, a miss of $120 million and down 3.3% year-on-year).
Management has identified three factors behind this disappointing result. Firstly, botched execution of an update to the company's loyalty program, Nordy Club, contributed to decreased sales as Nordstrom moved to a digital-only model. This led to the second damaging factor - updating the program limited the amount of capital that could be allocated to digital marketing, which also hurt sales. Finally, the company's merchandise simply hasn't been selling well. While the first two problems seem to be solvable, the third is a little more tricky. Management has promised to "adjust [their] merchandise assortment", but we will have to wait until the next sales data comes in to make sure that the changes have worked.
Is there value here?
Is this a cheaply priced stock? It currently trades at a price-earnings ratio of 10, which is a discount to the industry average of 15.5. It has a dividend yield of 4.6%, again beating the industry average of 2.12%. This leads to another question - is the dividend safe? Between the results for the fourth quarter of 2018 and the first quarter of 2019, Nordstrom added $1.5 billion in total liabilities to its balance sheet, mostly in the form of long-term debt. Its debt-to-equity ratio has risen from 3 to more than 6 over the last quarter. Meanwhile, operating cash flow has actually been decreasing year-to-year. Mounting debt and falling cash flows make me nervous when looking at an income stock.
With all that being said, a solid performance in the second quarter of this year could generate some upwards momentum for the stock. Right now, the market is pricing in the revised sales guidance provided by management on the recent earnings call - they went from predicting an annual sales increase of 1% - 2% to a decline of 2% to flat. If it turns out that these numbers are too conservative and sales are even slightly positive for the next few quarters, shareholders could catch some reprieve. However, that possibility does not provide me with an adequate margin of safety, and so I would prefer to stay out of this stock.
Disclosure: The author owns no stocks mentioned.
This article first appeared on GuruFocus.
