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Can Nordstrom's (JWN) Efforts Aid Stock Amid Margin Woes?

Zacks Equity Research

Shares of Nordstrom, Inc. JWN have lost 6.6% in a year due to soft gross margin for a while now. Increased markdowns coupled with higher promotions have been hurting the gross margin. Moreover, higher cost of investments toward occupancy, technology, supply chain and marketing are resulting in increased near-term costs. Nonetheless, the stock has outperformed the industry, which has declined 11.9% in a year.

Rise in supply chain costs reflecting higher fulfillment and delivery expenses in relation to digital growth is leading to higher expenses. Notably, management expects to incur $35 million as pre-opening costs toward opening women's store in New York this October. Also, the company has been making investments in its West Coast supply chain. All these expenses might weigh on the company’s margins and profitability.

In fourth-quarter fiscal 2018, gross margin contracted 33 basis points (bps) mainly due to increased markdowns resulting from soft sale trends in full-price stores and higher promotions. Nevertheless, management expects modest gross profit expansion in fiscal 2019 through endeavors to raise inventory turns and strategic brands growth.

Will Nordstrom’s Endeavors Offset Margin Woes?
Nordstrom’s store-expansion strategy to increase market share apart from driving its top line is quite impressive. The company has been progressing well with expansion in Canada by opening six Rack stores in fiscal 2018. In fact, it envisions a $1-billion sales opportunity from its expansion in Canada by 2020, including six planned full-line stores and 15 Rack stores. Moreover, management remains keen on domestic store expansion. Notably, these store-expansion efforts along with its increasing digital presence are likely to drive sales and overall profitability.

Additionally, Nordstrom is focused on boosting e-commerce and digital networks along with improving its supply-chain channels and marketing efforts. In fiscal 2018, digital sales improved 16%, representing about 30% of sales growth. Further, its generational investments contributed roughly $2 billion to sales growth and surpassed the company’s bottom-line expectation. In fiscal 2019, management expects generational investments to contribute roughly $2.2 billion to sales.

Meanwhile, Nordstrom’s smooth progress on its customer-based strategy places it well to attain the revenue target of $20 billion by fiscal 2020. The strategy focuses on three strategic factors — leveraging the company’s brand strength, providing excellence services and offering compelling products to its customers. It also remains on track to reach its target of EBIT margin of 6.3-6.5% by fiscal 2020. Moreover, the company expects additional savings of $150-$200 million associated with efficiency initiatives.

Given the aforementioned efforts, we expect Nordstrom to deliver sustainable growth in future. Moreover, its cost-savings efforts to strike a balance between sales and expense growth are likely to boost margins and overall profitability. Furthermore, this Zacks Rank #2 (Buy) stock has an expected long-term earnings growth rate of 6%.

Impressively, Nordstrom boasts a robust earnings surprise history, having surpassed estimates in 10 of the trailing 11 quarters. It also delivered sales beat in five of the last seven quarters.

All these factors might help bring the stock back on its growth trajectory.

3 More Promising Retail Stocks You May Count on

Abercrombie & Fitch Co. ANF has delivered average positive earnings surprise of 88.3% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Canada Goose Holdings Inc. GOOS delivered average positive earnings surprise of 82.7% in the trailing four quarters. The company currently carries a Zacks Rank #2.

Stitch Fix, Inc. SFIX, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 22.5%.

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