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Summary

  • Nordstrom had a solid quarter, confirms its full year outlook.
  • Credit card receivable deal could free up more cash.
  • Despite impressive and diversified growth, I am slightly worried about the valuation.

Investors in Nordstrom (NYSE:JWN) reacted with great enthusiasm to the company's first quarter results and the company's intentions to seek a financial partner for its credit card receivables.

Shares rose to fresh-all-time highs and despite the diversified source of growth, I remain hesitant to chase up shares at current levels due to valuation concerns.

First Quarter Headlines

Nordstrom reported first quarter revenues of $2.93 billion which is up by 6.6% on the year before. This included $94 million in sales related to credit cards, the business for which the company is exploring strategic alternatives. Comparable store sales rose by 3.9% which is impressive given the harsh winter conditions.

Reported earnings fell by 3.4% to $140 million. Thanks to moderate share repurchases the fall in earnings per diluted share was limited to a penny, with earnings coming in at $0.72 per share.

Reported earnings came in ahead of the company's outlook for earnings of $0.60 to $0.70 per share.

Looking At The Operations

While topline revenue growth was impressive, the company did face some margin pressure. Gross margins fell by a full 130 basis points to 35.8% of sales. Increased markdowns were required due to a heightened promotional environment as well as Rackstore's accelerated store expansion program.

This margin pressure was only partially offset by a 40 basis point reduction in operating costs which came in at 28.0% of sales. Leverage from higher sales and lower variable costs contained the pressure on operating margins.

The company blames the fall in earnings to increased investments in technology as well as start-up costs related to the entrance into Canada. Technology remains a key priority, with indirect sales growth accelerating toward 33% in the quarter.

Financial Partnership For Credit Card Receivables

Nordstrom's credit card business recorded $94 million in revenues for the quarter while reporting earnings before income taxes of $37 million.

The receivables portfolio totals approximately $2 billion and the company believes that a financial partner can maintain customer focus while increase financial flexibility. Such a move would free up cash for the company and lower the market's uncertainty about heightened losses for the business during recessions.

Looking Ahead

For the year, Nordstrom continues to forecast a 5.5 to 7.5% increase in its net sales which is driven by a 2-4% increase in comparable sales.

Gross margins are now seen 30-50 basis points lower which is 20 basis points more than previously forecasted. This is partially offset by a 0 to 20 basis point increase in selling, general and administrative expenses which is 10 basis points less than previously anticipated.

The company maintains its full year outlook for earnings of $3.75 to $3.90 per diluted share.

Valuation

Nordstrom ended the quarter with little over a billion in cash and equivalents. Total debt stands at $3.1 billion, resulting in a net debt position of around $2.1 billion.

Following a nearly 15% jump on Friday, shares trade at $70.50 per share which values equity in the business at $13.4 billion. Based on the full year outlook, revenues are seen at $13.4 billion while earnings are anticipated around $725 million.

This values equity in the business at 1.0 times annual revenues and 18-19 times annual earnings.

The quarterly dividend of $0.33 per share provides investors with a 1.9% dividend yield.

Takeaway For Investors

For Nordstrom, Rack is the major driver of expected growth. The chain currently has 140 stores within the US, a number expected to increase toward 230 by 2016. Other growth areas remain online, with multi-channel customers spending 3-4 times as much as single-channel customers, according to Nordstrom's recent investor presentation.

Further growth should be driven by expansion in Canada with 6 store openings being announced. Based on 8-10 full stores and another 15-20 Rack stores, a $1 billion sales potential is available.

Investors liked the good news show on Friday, pushing shares to fresh all-time highs after shares saw a big boost in a response to the news. The company's comparable store sales continue to be impressive given the circumstances while diversified sources of growth is comforting to investors.

That being said, the valuation already reflects a great deal of good news making me hesitant to chase up the stock at this point in time.

Source: Nordstrom: Fresh All-Time Highs After Friday's Good News Show