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Nordstrom (JWN) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Luxury department store chain Nordstrom (NYSE:JWN) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 4.8% year on year to $3.34 billion. It made a GAAP loss of $0.24 per share, improving from its loss of $1.27 per share in the same quarter last year.

Nordstrom (JWN) Q1 CY2024 Highlights:

  • Revenue: $3.34 billion vs analyst estimates of $3.20 billion (4.3% beat)
  • Gross Margin (GAAP): 33.9%, down from 36.2% in the same quarter last year (meaningful miss vs. expectations of 35.5%)
  • EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.07 (-$0.17 miss)
  • Free Cash Flow of $48 million is up from -$90 million in the same quarter last year
  • Locations: 365 at quarter end, up from 347 in the same quarter last year
  • Market Capitalization: $3.51 billion

Known for its exceptional customer service that features a ‘no questions asked’ return policy, Nordstrom (NYSE:JWN) is a high-end department store chain.

As the name suggests, a department store offers a wide variety of merchandise organized into different departments or sections. Before department stores, consumers would have to visit three different stores to buy a cocktail dress, mascara, and a duvet cover for their bed.

The core Nordstrom customer is a high-income shopper interested in designer brands and luxury goods. This customer can find brands like Gucci, Prada, and Alexander McQueen in a typical Nordstrom store or online. As mentioned, Nordstrom has an e-commerce presence which launched in 1998. An early adopter of omnichannel retailing in the luxury world, Nordstrom online sales represent a meaningful portion of sales today.

Compared to a typical department store such as Macy’s, Nordstrom is unique in a few ways. Firstly, the product selection is more curated, with less product on the sales floor due to the focus on quality over quantity. Secondly, there are fewer promotions to maintain its air of luxury. Finally, the company operates the Nordstrom Rack banner, an off-price concept. Nordstrom Rack purchases excess inventory from Nordstrom and others, then sells them at large discounts off the original price, appealing to a more budget-conscious customer.

Department Store

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Department store competitors include Macy’s (NYSE:M) and Dillard’s (NYSE:DDS). Those offering higher-end or designer merchandise include Farfetch (NYSE:FTCH) and Rent the Runway (NASDAQ:RENT).

Sales Growth

Nordstrom is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's revenue has declined over the last four years, dropping 1.2% annually as it failed to grow its store footprint meaningfully.

Nordstrom Total Revenue

This quarter, Nordstrom reported decent year-on-year revenue growth of 4.8%, and its $3.34 billion in revenue topped Wall Street's estimates by 4.3%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

Number of Stores

When a retailer like Nordstrom keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. Nordstrom's store count increased by 18 locations, or 5.2%, over the last 12 months to 365 total retail locations in the most recently reported quarter.

Nordstrom Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Gross Margin & Pricing Power

Nordstrom's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 36% gross margin over the last eight quarters. This means the company makes $0.36 for every $1 in revenue before accounting for its operating expenses.

Nordstrom Gross Margin (GAAP)

Nordstrom's gross profit margin came in at 33.9% this quarter, marking a 2.3 percentage point decrease from 36.2% in the same quarter last year. One quarter of margin contraction shouldn't worry investors as a retailer's gross margin can often change due to factors such as product discounting and dynamic input costs (think distribution and freight expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Nordstrom generated an operating profit margin of negative 0.6%, up 7.5 percentage points year on year. This increase was encouraging, and since the company's gross margin actually decreased, we can assume the rise was driven by a magnificent improvement in cost controls or operating leverage on fixed costs.

Nordstrom Operating Margin (GAAP)

Zooming out, Nordstrom was profitable over the last two years but held back by its large expense base. Its average operating margin of 2.1% has been paltry for a consumer retail business. However, Nordstrom's margin has improved, on average, by 2.4 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Sadly for Nordstrom, its EPS declined more than its revenue over the last five years, dropping by 9.7% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to its shrinking demand.

Nordstrom EPS (GAAP)

We can delve even further into Nordstrom's earnings performance. While we mentioned earlier that Nordstrom's operating margin improved this quarter, a five-year view shows its margin has declined 2.9 percentage points. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Nordstrom reported EPS at negative $0.24, up from negative $1.27 in the same quarter last year. Despite growing year on year, this print missed analysts' estimates. Over the next 12 months, Wall Street expects Nordstrom to perform poorly. Analysts are projecting its EPS of $1.83 in the last year to shrink by 4.9% to $1.74.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Nordstrom's free cash flow came in at $48 million in Q1, representing a 1.4% margin and flipping from negative in the same quarter last year to positive this quarter. Seasonal factors aside, this was great for the business.

Nordstrom Free Cash Flow Margin

Over the last eight quarters, Nordstrom has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.6%, subpar for a consumer retail business. Nordstrom's margin has also been flat during that time, showing the company needs to take action and improve its cash profitability.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Nordstrom's five-year average ROIC was 4%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Nordstrom's ROIC averaged 4.8 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Nordstrom reported $428 million of cash and $4.24 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.08 billion of EBITDA over the last 12 months, we view Nordstrom's 3.5x net-debt-to-EBITDA ratio as safe. We also see its $103 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Nordstrom's Q1 Results

We liked that Nordstrom beat analysts' revenue expectations this quarter. We were also glad its full-year earnings guidance exceeded Wall Street's estimates. On the other hand, its gross margin was well below expectations, leading to an EPS miss. Gross margin is important for any company but especially an area of focus for clothing and apparel retailers because misses on this line could mean discounting activity is higher than expected, which could suggest more price competition in the market or a poor inventory position (I have too much winter wear and now need to discount it during Spring to make space on the selling floor). Zooming out, we think this was still a mixed, quarter. The market was likely expecting more, and the stock is down 7.3% after reporting, trading at $19.50 per share.

Is Now The Time?

Nordstrom may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Nordstrom, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its popular brand makes consumers more likely to purchase its products, the downside is its relatively low ROIC suggests it has historically struggled to find profitable business opportunities. On top of that, its operating margins reveal poor profitability compared to other retailers.

Nordstrom's price-to-earnings ratio based on the next 12 months is 11.9x. While there are some things to like about Nordstrom and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $19.32 per share right before these results (compared to the current share price of $19.50).

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