A Department Store Renaissance?

When Kohl’s (KSS) first announced earnings, it appeared department stores were in for a rough quarter.

So it came as a bit of a shock when Nordstrom (JWN) beat revenue projections by $180 million.

Amongst department store stocks, it shot up to the number one in the search results, claiming the top spot by a mile for both financial pros and retail.

That’s not to say that everything turned up roses.

Non-GAAP EPS still came in at -$0.02 for the quarter as supply chain and inflation costs weighed on the retailer.

But with the broader retailer ETF XRT outperforming the broader market the last few weeks, it lured us into taking a second look at this iconic retailer.

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Nordstrom (JWN) Business

JWN bills itself as a high-end fashion retailer selling men’s, women’s, and children’s apparel, shoes, beauty products, accessories, and home goods. 

Along with brand names, the company offers its own private-label merchandise. 

JWN has an e-commerce presence thanks to its Nordstram.com,  Nordstrom.ca, and Nordstromrack.com websites.

In addition to Nordstrom stores, the company also owns and operates Nordstrom Rack, Last Chance clearance, and Nordstrom Locals. 

As of the end of Q1 2022, Nordstrom had 356 stores. 

Also in Q1, the company announced its sales increased by 19%. And its Nordstrom and Nordstrom Rack banners posted double-digit sales growth. 

Part of this stems from the evolution the company plans to drive consistency in available products through multiple channels.

At a time when stockouts are prevalent, Nordstrom prides itself on meeting customer demand and building brand loyalty.

Financials

While fiscal 2021 was a difficult year, Nordstrom bounced back with sales almost at pre-pandemic levels.

Gross profit margin (TTM) hit 36.8%, which is right in line with the sector median of 36.18% and better than any of the last 5 years.

Plus, it carried an EBITDA Margin (TTM) of 8.18%, which is slightly behind the sector median of 12.27%

JWN has experienced revenue growth of 32.26% YoY, which is exceptional when compared to the sector median of 23.25%. Ideally, the company hopes that meeting customer orders when others fail will help it retain and grow its market share.

Operating cash flow still lags behind as the operating margin remains compressed. Nordstrom’s current initiatives hope to streamline operations and store footprints to enhance online offerings and pickups. 

On the debt side, JWN’s capital structure is as follows: total debt of $4.67 billion and cash upwards of $484 million, and a market cap of approximately $4.26 billion. 

In 2021 JWN had a current ratio of 0.96x, which means its assets are not enough to cover its short-term liabilities.  

Furthermore, JWN in 2021 had a quick ratio of 0.17x,  which means its highly liquid assets were not enough to cover its short-term liabilities. 

That’s not great as its interest expense runs $247 million per year or nearly 1/3rd of its current operational cash flows.

Valuation

JWN holds an attractive P/E TTM at 11.86x with a forward P/E of 7.92x, both better than the sector average.

And its price-to-sales ratio of 0.28x is significantly better than the sector median of 0.91x.

The P/E GAAP (TTM) is 11.86, which bests the sector median of 12.61. 

JWN has a price-to-cash-flow ratio of 3.39x, which puts it in an elite class, the sector median is 10.96x. 

And the dividend yield of 1.43% isn’t too shabby either.

Our Opinion – 7/10

Nordstrom (JWN) presents an interesting opportunity.

It faces many headwinds, yet compared to the rest of the department store and retail sector, it’s showing it has the chops to compete effectively.

While we’d prefer to hold off until we get a better sense of the environment and whether the company can improve operating margins, this stock is worth keeping on your watch list.