Shares of Nordstrom (NYSE: JWN) performed well for much of 2018, as the upscale retailer was rewarded for investing heavily to improve its business. However, sales trends began to slow in the second half of the year, particularly at Nordstrom's full-line stores, causing Nordstrom stock to give up all of its gains and then some.
Nordstrom shares have continued falling in 2019, due to a pair of weak earnings reports. On Wednesday, the stock touched a new multiyear low near $30, a level it has not breached in nearly a decade. That's down more than 50% from the highs reached last fall.
Nordstrom Stock Performance, data by YCharts.
However, investors are overreacting to some relatively modest miscues, mostly self-inflicted. Nordstrom's sales and earnings should return to growth in the second half of 2019, driving a rebound for Nordstrom stock.
Nordstrom Rack is still a solid franchise
One reason why investors are wrong to lump Nordstrom in with other mall-based department store chains is that the company has a successful off-price chain. While department store stocks have been crushed this year, shares of off-price retailers like Ross Stores (NASDAQ: ROST) have run to new all-time highs. Ross Stores shares currently change hands for more than $100, or roughly 23 times the company's projected 2019 earnings per share.
Nordstrom doesn't break out profitability by business segment, but it does report revenue for the Nordstrom Rack off-price business. Last year, off-price sales reached $5.2 billion on a 3.5% full-year comp sales increase. That was just slightly worse than Ross Stores' 4% comp sales increase for the full 2018 fiscal year.
To be fair, Nordstrom's off-price business hit a pothole last quarter, as sales fell 0.6% year over year. However, one bad quarter -- following three consecutive quarters in which comp sales rose at least 4% -- isn't that concerning. With better execution, Nordstrom should be able to get this division growing again within a quarter or two. (Ross' performance hasn't been flawless, either.)
Nordstrom Rack posted strong growth in fiscal 2018. Image source: Nordstrom.
Ross Stores stock trades for about 2.5 times sales. Even if the Nordstrom Rack business is worth just one times sales, due to slower growth and profit margins that are almost certainly lower, that would put the division's value at more than $5 billion. Yet Nordstrom stock's recent plunge has left the entire company's market cap at just $4.7 billion.
The full-price business isn't dead, either
Thus, Nordstrom stock currently trades for less than the probable value of its off-price division. Nordstrom's full-price business is underrated, too.
Last quarter, full-price sales fell 5.1% year over year. However, full-price comparable sales rose modestly in fiscal 2018, as growth in Nordstrom's top-notch e-commerce business more than offset falling in-store sales.
Nordstrom is closing at least seven underperforming stores this year, while opening two new ones, including a flagship location in Manhattan. By upgrading its store base and opening its first full-line store in the massive Manhattan market, Nordstrom should be able to get its full-line sales and profit growing again over the next few quarters.
Additionally, Nordstrom owns or ground-leases full-line stores in dozens of highly attractive locations. The real estate value of its full-line store portfolio probably totals billions of dollars, providing a backstop for investors in the event that the business takes a turn for the worse.
Tremendous upside for investors
Nordstrom stock currently trades for just nine times the average analyst earnings-per-share estimate for fiscal 2019. Moreover, EPS could surge over the next few years, driven by the Manhattan store opening, the maturation of other growth investments, cost-cutting initiatives, and an aggressive share buyback plan.
With Nordstrom trading at such a modest valuation, it wouldn't take much growth to send the stock flying higher. Furthermore, the company has a good revenue balance between full-line stores, full-line e-commerce, and off-price retail, offering multiple potential pathways to growth.
Nordstrom stock has fallen from $65 to around $30 in less than a year. If the company can get Nordstrom Rack back on track and use the Manhattan flagship opening to return to growth on the full-line side of the business, the stock could get back to $65 before too long.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- 20 of the Top Stocks to Buy (Including the Two Every Investor Should Own)
- What Is an ETF?
- 5 Recession-Proof Stocks
- How to Beat the Market