The stock is cratering here on a reduced 2016 outlook of:
- Sales increase of 2.5-4.5%
- SSS flat YoY
- Retail EBIT decrease of $70-80MM
- Revised EPS of $2.5 - $2.7
Stock trades at $39.2 or market cap of $6.77 billion.
There is talk of markdowns to align inventory with sales. THIS IS A GOOD THING, SINCE IN A CYCLICAL SECTOR THE EXCESSES NEED TO BE BALANCED OUT EVENTUALLY TO BRING PRICE DISCIPLINE TO THE SECTOR.
That said, the pressure on Gross Margins due to discounting is not a good one. Gross Margins for Q1 came in at 35.4% vs. 37.8% a year ago. There are clear signs of discounting going on. Is this pressure cyclical or secular? That is always the question. Is Amazon destroying apparel? I doubt it.
The stock is interesting to me because it is a well managed business that has consistently generated FCF. Nordstrom and Nordstrom Rack offer value to customers and it shows.
That said, this is an industry with poor economics and severe competitive pressures.
From the 10K, this statement stood out for me:
"As we look ahead to 2016, we continue to view 2015 as our peak investment year. While we have successfully increased market share, we are also committed to increasing efficiency, lowering costs while increasing effectiveness and gaining profitability. With our investments moderating, we expect 2016 to represent an inflection point of earnings growth improvement."
This is important because JWN's CAPEX spend has risen dramatically is 2015 to $1.1b, which is dramatically higher than the past. So if CAPEX normalizes going forward, there's a chance of higher FCF generation here. The only issue is that the macro environment has turned down, so the inflection point in EPS may not be 2016 but slightly further out.
Nordstrom vs. Nordstrom Rack
Full price Nordstrom does the majority of revenues at $9.9b while off price Nordstrom Rack does $4.1b. SSS for brick and mortar stores is flat to declining, while online sales are going up. Clearly, JWN is a brick and mortar store. And the brick and mortar stock environment has turned promotional. However, JWN is unlikely to do as poorly as others in the environment given its focus on upper middle class consumers via Nordstrom.
Discussion on ROIC in 10K
There is a nice little discussion of ROIC in their form 10K. This clearly shows that management is shareholder focussed since this calculation is included in executive compensation. So expansion for the sake of expansion isn't something they would want to undertake. This is a positive for shareholders, but it also might drive conservative behavior in the face of a changing retail environment.
Down to the numbers now. The first step is calculating NOPAT (Net operating profit after tax). This is clearly a volatile number, but is used to show what the company made over the year. Then there's a calculation of invested capital. ROICs are 10.7% for 2015. RoA is lower at 6.6%. The bottom line here is that these are low numbers. But not awful is JWN is still operating at decent levels of profitability.