Nordstrom (JWN) had an excellent day yesterday, rising 24%. Should it have? In my opinion, the stock looks too expensive and needs to be sold. A look back at Nordstom's last two years is in order. Back in 2007, when life seemed good, management felt Nordstrom's debt was way too low and needed to be upped (see Q3 2007 conference call and this article).
They tacked on a lot of debt, borrowed $1.5 billion dollars and bought a ton of stock. They bought back stock hand over fist. Unfortunately they bought their stock at high prices. In 2007 alone, they spent $1.728 billion to buy 39 million shares, averaging $44.17 a share. The stock now trades at $9.76.
The shares Nordstrom bought back that year are now only worth $380 million. That $1.728 billion was only part of their buy back program. According to their Q4 2007 conference call, Nordstrom bought $3 billion dollars worth of stock over 5 years. Nordstrom's current market cap is now down to $2.1 billion. Wouldn't Nordstrom like that $3 billion now to help them through a very bad economic time?
So what has Nordstrom to show for its ill timed buying spree largely on borrowed money? It did succeed in increasing debt. Long term debt has ballooned from $623 million to $2.2 billion and interest obligations have gone from $45 million to $130 million a year. Its debt to equity ratio has gone from 0.29 in February 2007 to 2.36. In a dismal retail environment, Nordstrom must cope with declining sales (it projects 13 to 16% declines in same store sales)
In its last conference call, JWN announced the end of its shopping spree and canceled all future buy back programs. Unfortunately for Nordstrom, the charges for that shopping spree are coming due. This January, $250 million of that long term debt must be refinanced. Nordstrom is concerned that rates may be "unattractive" and is considering using future cash flow and its short term credit facility to cover that hole (conference call). To date, free cash flow has not looked well. During the last six months, free cash flow is negative $340 million.
To cope with the downturn, they have cut their capex next year from $560 to $350 million. That may not be enough. Nordstrom predicts only a small 35 to 45 cent EPS profit next quarter; last year's Christmas season came in at 92 cents. Next quarter's estimates keep getting smaller and smaller. Analyst consensus 60 days ago was 90 cents, 30 days ago 77 cents, 7 days ago 39 cents.
Given the dramatic decline in estimates, don't be surprised to see that 35 to 45 cents drop substantially. Nordstrom has put itself on a diet: no more buy backs. The question is: will this be enough to right itself?
Disclosure: Author holds a short position in JWN