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Strong Nordstrom Rack Performance Offsets Mall Weakness

Bridget Weishaar

Although narrow moat-rated Nordstrom (JWN) suffered from the same mall traffic weakness as competitors in the fourth quarter (Nordstrom brand comparable sales were down 2.7%), Nordstrom Rack strength (comparable sales up 4.3%) offset this, resulting in a 2% increase in total sales and a total comparable sales decline of less than 1%. More importantly, the quality of sales was high with retail gross profit up 112 basis points to 36%, reflecting solid inventory management and reduced competitive markdowns. We continue to believe Nordstrom is better positioned than its competitors with a smaller store footprint, differentiated customer service and product curation, and its successful complementary off-price concept. We expect to lower our 2017 6% revenue growth estimate to reflect management’s more cautious outlook (calling for flat comparable sales resulting in 3% to 4% revenue growth including the 53rd week) given apparel demand headwinds. That said, we think our long-term estimates calling for average annual mid-single-digit top-line growth and operating margin in the 6% to 7% range are reasonable for a future normalized retailing environment. Therefore, we see little change to our $48 fair value estimate and view shares as fairly valued.

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