Nordstrom: Buy On The Dips In Anticipation Of New All Time Highs

Aug.14.12 | About: Nordstrom Inc. (JWN)

Shares of Nordstrom (JWN), the higher end fashion retailer ended last weeks with gains of 3%. On Thursday after the close, the retailer announced its second quarter results.

Second Quarter Results

Nordstrom reported second quarter revenues of $2.92 billion, up 7.4% compared to last year. Same store sales increased 4.5% compared to 2011. The company reported net income of $156 million, compared to $175 million last year. Diluted earnings per share came in at $0.75 vs. $0.80 last year. The results are largely in line with analysts expectations. On average, analysts were looking for earnings of $0.74 per share, on revenues of $3.02 billion.

The Anniversary Sale, which is the largest sale, started one week later in July this year. This caused an unfavorable impact on the second quarter.

The company's direct e-commerce channel saw revenue growth of 40%, outpacing firmwide performance by a wide margin. Furthermore, the company opened 6 new Nordstrom Rack stores. The unit reported a 18.9% increase in sales, driven by 7.7% same store sales growth. Given the success of the unit, the company plans to more than double the current store count of 110 to 230, by 2016. In its conference call, Nordstrom said the company has been encouraged by the performance and ongoing growth opportunity of the division. The ambitious growth plans for Rack stores comes as a pleasant surprise for many analysts.

The company repurchased 7.5 million shares throughout the quarter for a total of $373 million. It still has $696 million left under its current repurchase authority.

Outlook

Based on the decent second quarter results, Nordstrom increases its full year earnings per share target. It now anticipates to earn between $3.40-$3.50 per share. This does not include the favorable impact from future share repurchases. Third quarter same store sales will increase in the high single digit rate, as a result of the shift in Anniversary sales.

For the full year of 2012, the company anticipates same store sales to increase between 6 and 7%.

Valuation

Nordstrom ended its second quarter with $1.26 billion in cash and equivalents. It operates with $3.13 billion in short and long term debt, for a net debt position of $1.87 billion. For the first six months of 2012, the company generated revenues of $5.45 billion. It net earned $305 million, or $1.45 per diluted share.

At this rate the company is on track to report annual revenues of $12 billion and earnings around $700 million, or around $3.50 per share. Based on the company's current valuation of $11.3 billion, the market values the firm at 0.9 times annual revenues and 16 times annual earnings.

This valuation compares to a revenue multiple of 1.4 times for TJX (TJX), 0.6 times for Macy's (M) and 1.8 times for Ross Stores (ROST). These competitors trade at 20, 12 and 22 times trailing annual earnings, respectively.

Currently, Nordstrom pays a quarterly dividend of $0.27 for an annual dividend yield of 1.9%.

Investment Thesis

Year to date, shares of Nordstrom trade with gains of 13%. Shares steadily marched upwards to $57 by early May, before correcting to $47 in June. Investors were worried that a slowdown in economic growth might impact retail spending, particularly at high-end brands and stores. From that point in time, shares recovered to levels around $56 at the moment.

Long term investors in Nordstrom have seen decent returns. Shares more than five-folded over the past decade, trading near their all time highs. Shares peaked around $60 in 2007, before falling to $15 in the darkest days of the correction in 2009. Shares steadily moved upwards again, trading near their all time highs. In the meantime, the retailer has boosted revenue growth, increased earnings and raised its dividend payout.

Nordstrom is a well managed company. It has a long term history of creating value for shareholders. I am a buyer on dips, on the expectation that shares will set new all time highs above $60 mark in the medium term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.