Nordstrom: Weak July Sales Could Provide Buying Opportunity
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Nordstrom Inc (NYSE: JWN) is set to report its Q2 financial results and 2012 outlook after the close of the financial markets on Thursday, August 9, 2012. After modest May SSS that caused a little concern over Nordstrom's top-line momentum, the company delivered the strongest June SSS (8.1% versus consensus estimates of 4.5%) among its peers. Going into July, we expect SSS to be negatively impacted by the later Anniversary Sale and suggest investors keep a close watch on the post-earnings stock movement as a pullback will present an attractive entry point.
We are optimistic that Nordstrom will continue to generate healthy sales growth and outperform the retail sector as a whole in the coming months, since JWN has a unique positioning in the department store sector while also benefiting from its off-price Rack division. We expect upside to be driven by effective merchandising and technology/direct channel investments, greater penetration for the Rack (higher margin, sales per square foot), improvement in the women’s category and the partnership with Topshop and Topman.
Low Q2 SSS guidance not a concern
Earlier in July, even after a 6.8% quarter-to-date SSS increase, the company guided to low-single digit SSS guidance for Q2, which implies a 5%-15% SSS decline in July. The stock may pull back when the company announces its July sales as well as Q2 results next month. We believe that it will create a good buying opportunity, as the sales decline in July can be attributed to the timing of JWN’s Anniversary Sale (started on 20th July, a week later compared with last year) and the lost July sales due to the timing shift of the sale should be made up in August.
Rack division offers additional opportunities
Nordstrom is able to compete in the mainly compelling off-price sector by providing value-oriented offerings to the consumer and attracting moderate income and younger shoppers via its off-price Rack division. The Rack is a significant part of the company’s expansion plans and should add to square footage growth for the next several years.
Uniquely positioned department store with standout customer service
Nordstrom’s full-line stores are uniquely positioned between the moderately priced department stores, like Macy’s (NYSE: M) & JC Penney (NYSE: JCP), and the high-end department stores like Saks (NYSE: SKS), thus offering customers a compelling assortment of contemporary brands and private label merchandise. Their department store model is based on providing their clients with superior customer service, which we believe further ads to Nordstrom’s differentiation in the space. In addition to consistently updating the merchandise assortment and ensuring fresh offerings, the personal stylist program continues to grow. Over the past three years the number of personal stylists in the stores has tripled to around 1,300.
Partnership with Topshop and Topman
JWN is set to launch Topshop and Topman in 14 Nordstrom stores across the country and on the website during the week of September 10th, 2012. This will make Nordstrom the only large US retailer to sell a broad assortment of the British Fashion brands’ merchandise in-stores and online. We believe this is a positive move as it will differentiate the company and make it more appealing to a larger audience with a minimal risk.
Efforts to Lift HauteLook Business
Nordstrom is applying more resources to its HauteLook business to improve its sales and profitability. JWN management is focusing on the procurement of high fashion brands and in the liquidation of excess inventory through the Rack stores following the flash sales and returns that followed. Though it will have limited impact in the near future, going forward into 2013 and beyond, it will have a significant impact as the HauteLook business becomes profitable and grows beyond its current revenue of $150 million.
We believe mid-to-high single-digit top-line growth is sustainable over time. However, the women's category, which represents more than one-third of revenue, has yet to show noticeable improvement, but we still believe it represents a significant opportunity over time. Furthermore, JWN’s high return on invested capital of 14.2% in 2010 stands out as compared to its department store peer average of 9.1% and illustrates sensible decision making. Thus, we remain bullish on this stock.
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