We have maintained our long-term Neutral recommendation on Nordstrom Inc. (JWN) with a target price of $47.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
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 toward the entire family, through a strong nationwide network of 204 stores situated across 28 states.
The company has a strong line up of globally recognized brands, catering primarily to the upscale segment, enabling Nordstrom to generate high margin revenue. Consequently, this provides a competitive advantage to the company and bolsters its well-established position in the market.
Moreover, the acquisition of online private sale leader HauteLook Inc. will help Nordstrom in building multi-channel retailing.The acquisition will facilitate the company to increase its direct business capabilities, implement enterprise-wide inventory management system, sell directly to online customers and enhance the company’s customer service.
In addition, Nordstrom’s operations are based on a variable cost business model and approximately 40% to 45% of selling, general and administrative expenses are variable in nature. This flexible cost structure not only facilitates the company to mitigate the impact of sluggish sales trends on margins, but also enables it to quickly capitalize on the emerging opportunities when market conditions recover. Consequently, Nordstrom can expect a steady improvement in profitability moving forward.
Besides, Nordstrom’s second-quarter 2011 earnings of 80 cents per share surpassed the Zacks Consensus Estimate of 73 cents and surged 21.2% from 66 cents posted in the prior-year period, primarily driven by strong top-line performance, resulting from increased comparable store sales and improved margins.
Bolstered by better-than-expected quarterly result, the company has raised its earnings guidance range for fiscal 2011 in between $2.95 and $3.10 per share from $2.80 to $2.95 forecasted earlier.
However, consumer’s confidence and spending behavior may dampen due to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels,which may negatively affect their disposable income, and in turn, the company’s growth and profitability.
Above all, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players, such as 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 the existing market share, the company may resort to aggressive pricing, which could affect its margins.
