Stock Pick of the Week: Nordstrom ($JWN)
A look at how Nordstrom can stay relevant in a sea of retail competition
Pocket Change is a newsletter where Tony + Karine keep track of and analyze stocks we think are noteworthy (and whether we should invest pocket change into). We’ve been friends since 2013, and have been sending each other stock suggestions and portfolio screenshots over the years. Pocket Change is our way of opening up the conversation and sharing these ideas more publicly. This newsletter goes out every weekend with our analysis and decision for a new stock.
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Summary
Nordstrom was founded in 1901 as a retail shoe business by John Nordstrom and Carl Wallin, and it was called Wallin & Nordstrom. Today it is run by the great-grandsons of John Nordstrom: Erik as CEO and Pete as Chief Brand Officer. The company stock has struggled this year due to the COVID-19 pandemic and the forced closure of malls and retail locations. Shares of Nordstrom are down nearly two-thirds this year, with the stock now trading at about $13 -- near a historic low. However, we think that Nordstrom could be a good choice for recovery into next year.
This year, we saw the bankruptcy of many well known department stores like Neiman Marcus, Lord & Taylor and J.C. Penny as well as retailers like J. Crew and Brooks Brothers. Many of them failed to ride the trends towards athleisure and value. As COVID-19 closed their doors, many of them also did not have the right digital infrastructure to support e-commerce either. Nordstrom, if it can survive this year, could take market share from these failed retailers.
Fundamentals (FY19)
Net Sales: $15.1B, down 2.2% YoY
Digital Net Sales: 33%, up 7% YoY
EBITDA: $1.38B
EV/EBITDA: 6.2x
How Nordstrom Makes Money
Nordstrom operates in both Full-Price and Off-Price segments.
Full-Price (65% of Revenue): This includes 116 stores located in prime “A” rated malls. In 2019, net sales decreased by 3.5%. Nordstrom is well known for its stellar customer service, and it is scaling that value proposition through 5 Nordstrom Local in key markets like Los Angeles and New York, which offers express service such as alteration, pickups and returns.
Off-Price (35% of Revenue): This segment buys from similar merchandise as Full-Price and serves as a clearance outlet. The 248 stores are mostly included in off-mall centers. In 2019, net sales increased by 0.2%.
Combined the company made $15.1B in net sales with a gross profit of 34.4%. In terms of categories, women’s apparel, shoes and men’s apparel make up 31%, 24% and 16% of net sales respectively. During the pandemic, it has shifted more of its merchandise away from dresses towards home furnishing and more casual, WFH-friendly apparel.
Growth Opportunities + The Road Ahead
Overall, Nordstrom has been able to maintain its strength as a retailer over the years by focusing on three strategic pillars as outlined in their annual report - 1) a compelling product offering, 2) delivering outstanding services and experiences, and 3) leveraging the strength of the Nordstrom brand. In today’s day and age, consumers have a plethora of choice - whether it’s directly from indie or direct-to-consumer brands or influencers on Instagram, lifestyle retailers like Revolve or Verishop, to the myriad of fashion options available at t he big retailers like Target, Amazon, Walmart.
In order to stay relevant as a retailer, Nordstrom has a few ways it can continue to grow.
Curation of direct-to-consumer or exclusive brands - In many ways, influencers and social media have taken the role of curation retailers previously provided. Nordstrom must continue to provide a relevant curation and selection of high-quality brands and private label merchandise. Nordstrom hopefully can remain the top retailer partner of choice for up-and-coming brands - they’ve previously offered flexible Pop-In shops for the trendiest brands like Opening Ceremony and Casper, and partnered with fashion influencer Arielle Charnas to launch her exclusive line Something Navy (driving more than $1 million in sales in less than 24 hours.), and both initiatives have been huge successes.
Premium, Quality Experiences - Nordstrom has always been committed to delivering the best possible customer service and experience. In recent years, they’ve made it extremely easy to get alterations, pickup orders, personalized styling online and in-store, and have even added dining in their stores to make shopping fun, personalized and convenient.
Digital growth, particularly within Off-Price - Nordstrom’s e-commerce increased +20% YTD. With the shutdown of physical retail in the near future, Nordstrom should continue investing in a more seamless online checkout experience and in-app to capitalize on the recent uptake in e-commerce shopping. Particularly within its off-price segment, Nordstrom is in a better position to repurpose photos for Nordstrom Rack’s website, unlike its competitors like TJ Maxx or Marshalls. With many Americans out of work due to COVID, there will also be more demand for value oriented off-price merchandise, which Nordstrom Rack can benefit from.
Competitors / Risks
Liquidity: When the pandemic hit, Nordstrom immediately took action to reduce cost and raise cash, including drawing on a bank revolver loan and issuing additional debt. In Q2, they were able to generate a small operating cash flow and repaid some of the revolver. However, due to the conditions of the revolver, they are not able to pay a dividend or buy back their shares. It could be several quarters before they regain financial flexibility from their normal course of operation and reissue their dividend.
Other Retailers: As mentioned above, retail is a competitive business. There are many retailers, omni-channel department stores, specialty stores, off-price stores and boutiques, which carry similar lines of merchandise, or are more specialized in a specific category. The keys to staying relevant truly will be about providing a curated, compelling selection of product across a range of price points, enabling a seamless digital and physical checkout experience, and of course, remain a relevant brand in the minds of consumers.
Key Questions to Ask Yourself (before we think you should buy...)
Do you think Nordstrom can remain relevant among a sea of competition?
Can Nordstrom continue curating premium products and evolve its omni-channel experience over the next few years?
Our Take
While Nordstrom is currently taking action to adapt to the pandemic, we think Nordstrom is well-positioned to remain relevant as a modern retailer and is a good buy at the valuation for recovery in 2021.
Note this is not investment advice. Please consider doing your own research before making any investments!
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