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Shares of Nordstrom (JWN) fell some 5% on the final trading day of the past week.

Shares of the fashion retailer sold off after the company released disappointing same store sales results, a trend which will continue through the year and prompted management to lower its full year guidance.

At current levels, shares are fairly valued and the recent sell-off has been warranted given the slowdown in comparable sales growth.

Second Quarter Results

Nordstrom generated second quarter revenues of $3.20 billion, up 6.3% on the year before. Same-store sales growth came in at 4.4%, roughly in line with last year's growth rate of 4.5%. Reported comparable store sales growth fell short of consensus estimates of 6.8%.

Net earnings rose to $184 million, up 18% on the year before. Earnings per share rose by 24% to $0.93 per share and came in ahead of consensus estimates of $0.88 per share.

Looking Into The Results

Nordstrom saw its sales showing a moderate improvement relative to the start of the year, as they came in softer than anticipated.

The Anniversary Sale, which is Nordstrom's largest sale event, overlapped in the second and third quarter of last year. This resulted in a favorable comparison this year for the second quarter, while causing different comparables in the third quarter. The Anniversary sale boosted revenue growth by 250 basis points and earnings per share by six cents over the past quarter.

Same store sales growth was driven by direct sales which rose by 37% on the back of increased merchandise selection and additional technology investments. Same-store sales in physical stores fell by 0.7%.

Gross profits fell by 13 basis points on the back of expenses related to the Fashion Rewards loyalty programs, as the company now has 3.6 million members.

Selling, general and administrative expenses fell by 105 basis points thanks to operating leverage from higher sales and the favorable impact of the Anniversary Sale event.

Earnings before interest and taxes rose to $335 million, and was up by 90 basis points to 10.8% of total sales.

..And The Outlook

Full year earnings are now seen between $3.60 an $3.70 per share, which compared to a previous outlook of $3.65 to $3.80 per share. Consensus estimates for full year earnings stood at $3.78 per share.

Full year same store sales growth is now seen between 2% and 3%, which compares to a previously guided 3% to 5%.

Valuation

Nordstrom ended its second quarter with $1.13 billion in cash and equivalents. The company operates with $3.12 billion in short and long term debt, for a net debt position of $2 billion.

Total revenues for the first six months of the year came in at $5.95 billion, up 5.6% on the year before. Net earnings rose by 7.9% to $325 million, while earnings per share rose by 14.5% on the back of share repurchases.

Full year revenues are seen around $12.5 billion as revenue growth in the important second half will stagnate. Full year earnings are seen around $700 million.

Trading around $56.50 per share, the market values Nordstrom at around $11 billion. This values operating assets of the firm at 0.9 times annual revenues and 15-16 times earnings.

Nordstrom currently pays a quarterly dividend at $0.30 per share for an annual dividend yield of 2.1%.

Some Historical Perspective

Long-term holders in Nordstrom have seen very decent returns. Shares rose from $15 in 2003 to a peak at around $60 in 2007. Following the financial crisis, shares have fallen to lows of $10 at the end of 2008.

Shares have gradually recovered to fresh all time highs of $63 earlier this year, but have seen a 10% correction in recent weeks.

Between 2009 and 2012, Nordstrom increased its annual revenues by a cumulative 40% to $12.15 billion. Net earnings increased by two thirds to $735 million. On top of that came the fact that Nordstrom retired a tenth of its shares outstanding, thereby accelerating earnings per share growth.

Investment Thesis

Investors are not pleased with the softening revenue trends which started in the second quarter and will continue to have an impact throughout the remainder of the year.

Yet current earnings are not affected too much yet given the strong discipline with regards to inventory and expenses. The continued growth of the direct sales unit is a great help as well.

Yet Nordstrom remains upbeat about future revenue growth. The company hopes to open 5 stores in Canada in the fall of 2014, which should result in a $1 billion business per annum going forwards. The build-out of Nordstrom Rack stores and the continued development of the online business should result in the fact that Nordstrom receives half of its revenues from these businesses combined in five year's time.

The Nordstrom Rack business saw a solid same-store sales increase of 2.4%, as Nordstrom anticipates to double the store count by 2016. The company aims to open 14 new Rack stores during the remainder of the year. At the moment Nordstrom operates 117 regular Nordstrom stores and 131 Rack Stores, after net opening 17 Rack stores over the past year.

The outlook is disappointing, yet a recent 10% correction implies that shareholders have incorporated the bad news. Nordstrom has long been a favored stock within the investment community as the investment community appreciated the solid comparable sales growth numbers reported by the firm.

While the 2-3% guidance for full year comparable sales implies that growth will come in around flat in the second half of the year, the slowdown in growth is exaggerated \due to the shift of the Anniversary Sale. Adjusting for this the slowdown in comparable sales is still there, but a lot less severe than headline numbers imply.

Yet I think the recent sell-off is justified as premium valuations for retailers are only warranted when reporting solid comparable sales growth. With comparable sales growth slowing down rapidly to 2-3%, a 15-16 times earnings multiple, accompanied by a 2% dividend yield, is relatively fair in my opinion.

I remain on the sidelines.

Source: Nordstrom: Fairly Valued As Same Store Sales Growth Declines