This Luxury Stock Offers Upside Potential
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Most retailers saw a strong gain in August sales, boosted by a good back to school season. Retail's performance is particularly impressive given the general economic uncertainty around the presidential election campaign and a sharp spike in gas prices. Retailers like Ross Stores Inc. (NASDAQ: ROST), The TJX Companies Inc (NYSE: TJX) and Nordstrom (NYSE: JWN), all posted impressive same store sales (SSS) growth.
|
Company |
Ross Stores |
TJX |
Nordstrom |
|
August SSS Growth |
8% |
8% |
21% |
Nordstrom had the largest gain with a 21% increase in same store sales. Despite a strong August, there are some concerns that the reported number was merely a consequence of the Anniversary Sale shift as the final week of the event moved into August from July a year ago. While, I do acknowledge that the Anniversary Sale shift has elevated the sales levels in August, but Nordstrom’s same store sales growth for the combined 2-month period (i.e. July-August, to adjust the shift) stands extremely solid at ~8.4%.
Nordstrom appears undervalued when compared to Ross Stores and TJX. The following graph summarizes the data (sourced from Yahoo Finance) for forward P/E, next year’s estimated growth and estimated annualized growth for the next 5 years.
|
Company |
TJX |
Ross Stores |
Nordstrom |
|
Forward P/E |
16.59 |
17.79 |
14.50 |
|
Est. Growth Next Year |
11.70% |
12.10% |
14.40% |
|
Est. Growth for Next 5 Years |
12.44% |
13.50% |
12.15% |
Despite having a similar growth profile with Ross Stores and TJX, Nordstrom is trading at a 13%-19% discount to these companies. Moreover, I think with a stable high-end customer base, the company remains relatively immune to the economic conditions. As a matter of fact, in a tough macro environment, Nordstrom’s July and August same stores sales (0.9%, 21%) were far better than the consensus estimates (-2.7%, 11.2%). The following are the key reasons I am optimistic about the company’s growth prospects.
Rack Business in Good Shape
Nordstrom’s Rack business continued its strong performance and posted a 7% August same store sales growth. Rack continues to benefit from strong merchandising and value-oriented offerings. Rack stores and full-line stores have only ~30% customer overlap and thus, rack stores expand the customer base while also helping clear full-line inventory. While strong sell-through at full-line stores pressured sales in 2010-2011, Rack sustained high profitability and above-plan opening performance, with recent momentum supported by the addition of Fashion Rewards. Rack now operates at a higher EBIT margin and generates superior ROIC versus full-price Nordstrom stores. Going forward, Rack stores will be using handheld scanning devices for checkout. This will speed checkout and might improve productivity as fewer registers in the stores will make room for more merchandise.
Unmatched Customer Service
Nordstrom offers differentiated collection with best-in-class customer service in the industry. A broad-based offering enables Nordstrom to flex its assortment based on customer demands. The company has made significant systems investments to enhance service, including through Personal Book, Fashion Rewards, "Buy Online, Pick Up In Store," and sophisticated inventory systems. Moreover, the company pays its sales force on commission; thus creating an incentive to build long-term relationships which in turn will help in establishing a stable customer base.
Effective multi-channel model
Nordstrom is well positioned with a highly integrated direct platform (online inventory reflects store inventory). The company will be spending $140 million (30% of its capital expenditure budget) on e-commerce improvements this year and adding 400 more employees. Ongoing enhancements and additional talent should help mitigate tougher comparisons; supporting continued robust growth.
Over the last year, operating margins have suffered a little as a result of investments in essential business initiatives. However, going into the second half, I think profitability will improve as the company starts to reap the benefits of these investments. I believe that sales trends will remain robust over that balance of the year as various merchandise initiatives combine with Rack store growth. In addition, Nordstrom’s “best-in-class” customer service will drive long term growth. Thus, I anticipate a further upside in Nordstrom shares and recommend buying it.
sandeep2gupta has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
