2023-05-23 13:14:26 ET
Summary
- Nordstrom will publish its Q1 results on May 31.
- We touch upon a few themes that will dominate the earnings event.
- Taken in isolation, Nordstrom’s valuations look compelling, but relative to other department peers, it is less so.
- We like what we see on the charts.
Introduction
US-based fashion retailer, Nordstrom, Inc. ( JWN ) intends to publish its Q1-24 results (the company follows a Jan year-ending calendar) on May 31 , post-market hours. Here are some notable considerations ahead of the big event.
Earnings-related considerations
During earnings season, Nordstrom’s stakeholders are unlikely to be in a state of zen, as the company’s recent track record has been all over the place. For instance, over the last 12 quarters, the company has missed bottom-line estimates on five separate occasions and delivered on-par results once (last year’s Q2). Needless to say, it beat estimates during the other six remaining instances, and crucially, the average beat was rather large at over 100% (skewed no doubt by the H2-21 results).
As far as the upcoming Q1 is concerned, the headline estimates don’t look great. Firstly, investors need to consider that Q1 has traditionally proven to be the seasonally weakest quarter of the year and this won’t change this year either. Sell-side analysts currently expect Nordstrom to deliver revenue of $3.11bn , which would not only represent a sequential decline of 28% QoQ but also a YoY decline of -10% (for context, in Q4 the topline had declined by -4%). Do consider that this is likely to get worse in Q2, as management had previously guided for low double-digit declines in H1 as a whole. However, in H2, things should reverse as FY numbers currently point to a much better revenue growth cadence of -4.7% (which would imply positive revenue growth in H2).
Besides the seasonal challenges in Q1, we think it would be asking for a lot to expect ample YoY growth when you consider that Nordstrom had delivered impressive topline growth of 19% in the base period, over a year ago.
Topline dynamics in this quarter will also be hampered by the wind-down of their Canadian operations (potential revenue attrition of $400m for the whole year). The wind-down of these Canadian operations will be more keenly felt on the Q1 bottom line, with potential pretax charges of $300-$350m that will be absorbed entirely in Q1. As a result, group bottom line estimates for Q1 look rather sobering at $-0.18.
In Q1 investors will be looking to see if the influx of more strategic brands has helped improve the prospects of Nordstrom's off-price segment- Nordstrom Rack. These brands reportedly have better sell-through dynamics and accounted for 50% of Nordstrom Rack’s FY22 sales. Management wants to improve this share, as it accounted for 60% of advance orders for H1.
JWN management will likely touch upon ongoing supply chain initiatives and how this has reflected well on the SG&A base, and eventually driving overall lower cost per units. For context, in Q4, the company did very well to extract a 200bps improvement in the SG&A margin despite inflationary pressures and weak sales leverage.
Towards the end of the year, JWN did well to return to a positive OCF (operating cash flow) position, and much of this was driven by what they did at the inventory level (which finally reached 2019 levels in Q4). Basically in Q4, the company resorted to significant markdowns to correct its inventory position (inventory days which was over 100 dropped to 78 by Q4), and this helped boost the cash by +$0.8bn.
In Q1, the markdowns will not be at the same level seen in Q4, but management also did clarify that they still need to adjust inventory levels in a few more pockets (perhaps the designer business which closed the year in a weak position) in H1, so there’s a good chance, we continue to see better inventory turns and positive FCF in Q1 as well.
Investors will also be keeping a keen eye on whether Nordstrom has been able to curtail its leverage. A year ago, management had stated that it was looking to bring down its leverage ratio to 2.5x, but the company eventually closed the year at much higher levels of 3.1x. This year, investors are likely to be more stringent with their leverage expectations, and a miss with the leverage target the second year running won’t be taken well
Valuation considerations
Prima facie, if one takes Nordstrom’s January 2025 (basically FY24) EPS estimate ( $1.962 ) into consideration, its forward valuation looks dirt cheap relative to history. For context, you’re looking at a forward P/E of just 8.1x, which would represent a ~44% discount to the long-term average multiple.
However, investors should also consider how this compares relative to some of the other notable department store options. Firstly, consider that an EPS of $1.962 would represent only 3.8% YoY growth. Would you pay 8x P/E for a stock that gives you 4% earnings growth? Note that the sector average earnings growth is closer to 5%. The other thing to note is that the 8.1 forward P/E also represents a premium over the sector average P/E of 6.9x. And finally, even though you get a massive 44% discount relative to the historical average, note that with the likes of Dillard’s ( DDS ), and particularly Kohl’s ( KSS ), the valuation differential (relative to the long-term average) is a lot more pronounced.
Technical considerations
As a rotational play within the retail sector, Nordstrom could attract some interest as the relative strength ratio of the stock as a function of the SPDR S&P Retail ETF is trading close to the lower boundary of its long-term downward sloping channel and is also a long way from the mid-point of the range.
Similar dynamics are also noted on Nordstrom’s standalone weekly chart. Since late 2021, the stock has been trending lower in the shape of a consistent descending channel, but it looks like, since mid-March, the stock has been attempting to consolidate and build a base within the $14-$17 levels. Interestingly enough, this also coincides with the lower boundary of the channel. If one were to contemplate a long position at the current price point, using the two channel boundaries as guideposts, you'd be looking at a very attractive reward-to-risk ratio of 4.5x. It’s also worth noting that JWN is one of those names that could benefit from a potential short squeeze with short-interest of float at a very high 22.46% .
For further details see:
Nordstrom: A Few Considerations Ahead Of Q1 Earnings