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How to Trade Nordstrom, Inc. After Earnings Plunge

Bret Kenwell

Nordstrom, Inc. (NYSE:JWN) did not tell investors what they wanted to hear last week when the retailer reported first-quarter earnings. That’s evident by the more than 10% decline in JWN stock. However, shares have been on the mend and key support has held. So how do we handle JWN stock from here?

Let’s look at the trade setup first.

Trading JWN Stock

JWN stock is trading like a lot of other retailers right now. On Thursday, we pointed out similar price actions in Target Corporation (NYSE:TGT) and Kohl’s Corporation (NYSE:KSS). Both companies reported earnings and fell, but saw key support hold up. Here’s how we’re trading them.

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chart of JWN stock price


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As you can see on the chart above, the $45- to $46-level has been key support all through 2018. While JWN stock broke below the 100-day and 50-day moving averages, the 200-day moving average held up. Resistance sits in the low-$50s.

The simple observation is that JWN stock is range-bound. That means until it breaks out over resistance or drops below support, it’s likely to trade between about $45 and $52. Being range-constricted may be frustrating for investors, but it’s not the worst thing we could endure — at least it’s not falling endlessly.

It helps that JWN stock also pays out a 3.1% dividend yield.

Remember that Nordstrom, Inc. was trading at $38 in November. So its rally into the upper $40s is no small feat. I actually feel pretty constructive about JWN stock — as long as support holds up and it can consolidate. If JWN can make it through the summer months without tanking, it will have the back-to-school season and the holidays to look forward to.

Plus, even though it’s apparently off the table right now, the family bid to take Nordstrom private is always there.

Trying on JWN Stock

The drop in JWN stock came despite the company beating on earnings per share and revenue expectations. However, as is often the case, the stock’s reaction wasn’t completely due to the past quarter results. Instead, it’s on the future and what management said during the conference call.

Management stuck with its guidance for full-year revenue of $15.2 billion to $15.4 billion, well short of the $15.64 billion analysts’ are modeling for. They also trimmed their EBIT outlook to a midpoint of $912.5 million from $917.5 million, although that’s still ahead of analysts’ expectations for $907 million. They also lowered the bottom end of their earnings guidance by a nickel, down to $3.30 to $3.55 per share.

Of course, it didn’t help that comparable-store sales for the quarter came in at 0.6% vs. expectations for 1% growth. Margins slipped too, albeit just slightly.

Valuing JWN Stock

Obviously, the quarterly results weren’t perfect. But I think the rebound in JWN stock is showing that perhaps a 10% haircut was a bit dramatic. It’s not like management slashed sales guidance or margins dipped horrendously. The drop in EBIT and earnings expectations was only minor and is still better-than-forecast as it stands.

It does leave many investors wondering how much JWN stock is worth, though.

Overall, analysts expect sales to grow just 1.5% this year and almost 3% in 2019. However, it’s worth noting that’s not based on management’s outlook, which even at the high end of their range would indicate a slight year-over-year decline.

On the plus side, analysts expect an 18% boost in earnings this year, followed by a 3.5% gain next year. This would indicate that net margins are set to expand going forward. For all of this, we’re paying about 13.5 times this year’s earnings. In other words, JWN stock isn’t expensive and we’re getting paid 3.1% to hold onto the stock.

So where to from here?

The bottom line is simple: JWN is like TGT, KSS and a number of other retailers. It’s doing fine, but certainly not great. It’s not Costco Wholesale Corporation (NASDAQ:COST) or Home Depot Inc (NYSE:HD) — but it’s far from J C Penney Company Inc (NYSE:JCP) or Sears Holdings Corp (NASDAQ:SHLD).

The low-risk play would be to buy JWN stock near $46, should it re-test support.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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