We are reiterating our long-term ‘Neutral’ recommendation on Nordstrom Inc. (JWN) with a target price of $45.00 per share.
Nordstrom is one of the leading players in the extremely-fragmented specialty retail sector. The company offers a broad array of over 500 brands, targeted at the entire family, through a strong nationwide network of 204 stores situated across 28 states.
Also, the company has a strong line-up of globally known brands, catering primarily to the upscale segment, enabling Nordstrom to generate high-margin revenue. This provides a competitive advantage to the company and bolsters its well-established position in the market.
In February 2011, Nordstrom entered into an agreement to acquire the online private sale leader HauteLook Inc. The deal, expected to close by the end of the first quarter of 2011, will help the company build multi-channel retailing. The acquisition will enable the company to increase its direct business capabilities, implement an enterprise-wide inventory management system, sell directly to online customers and enhance customer service.
Additionally, Nordstrom would continue to draw the benefits of its variable cost business model as 40% to 45% of its selling, general and administrative expenses are variable in nature. This flexible cost structure not only helps the company to mitigate the impact of sluggish sales trends on margins, but also enables it to quickly capitalize on emerging opportunities when market conditions recover.
On the other hand, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players like Gap Inc. (GPS), Limited Brands Inc. (LTD) and Abercrombie & Fitch Co. (ANF). The company primarily competes on the basis of fashion, quality and service. To retain its existing market share, the company may have to mark down sales prices, thereby affecting margins.
Also, Nordstrom’s business is seasonal in nature and generates a high proportion of sales during the second and fourth quarters, which are characterized by the company’s anniversary sale and holiday season sales. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.
Besides competition and the seasonal nature of the business, consumer confidence and spending behavior may fluctuate due to macroeconomic factors. These include interest rate hikes, increase in fuel and energy costs, credit availability, high unemployment levels and high household debt levels, which may negatively affect the disposable income of consumers and, in turn, the company’s growth and profitability.
Nordstrom holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.
ABERCROMBIE (ANF): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
LIMITED INC (LTD): Free Stock Analysis Report
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