Analysts Take Rain Check On Nordstrom After 'Eh' Q3 Report

Nordstrom, Inc. JWN plunged as much as 15 percent Friday despite reports of a marginal bottom-line beat, better-than-expected gross margins, in-line comps and raised sales guidance.

Here's what the analysts are looking at.

Inventory Trends

Nomura is increasingly concerned with mounting inventory ahead of the holiday season.

“After several quarters of expressing our fear that inventory levels across the dept store channel were not as healthy as they seemed amid a growing diversion of excess product to off-price channels, 3Q reports are making the inventory situation harder to ignore,” analyst Simeon Siegel wrote.

Siegel expects the backroom buildup to weigh on Nordstrom’s future pricing power.

Full-Line And Discount Mix

Nordstrom reported more returns from its second-quarter Anniversary sale than Bank of America had anticipated. The resulting weight on full-line comps “was disappointing.”

“We think that the Anniversary sale continued to cannibalize other quarters,” analysts Lorraine Hutchinson and Heather Balsky wrote.

They attributed a decline in both gross and earnings-before-interest-and-tax margins partly to higher Rack sales.

Depressed Gross Margins

William Blair expressed concern over gross margins, which closed the quarter down but run flat on the year. The metric was “pressured by higher mix of off-price business in the quarter,” analyst Dylan Carden wrote in a note.

He forecasts an inflection in legacy investments, including the rollout of Nordstrom Rack in Canada and the scaling of Trunk Club, to drive upside to 2019 guidance.

Share Repurchases

Carden also sees a $1.4 billion earnings driver in Nordstrom’s $3.7 billion buybacks intended for the next five years..

“With limited margin upside embedded in the five-year plan (where we think management is potentially being conservative) and stable low-single-digit sales growth, the scale of proposed buybacks can do much to drive earnings in the coming years,” he wrote.

The Ratings

• Bank of America Merrill Lynch maintained an Underperform rating with a $48 price target.
• Nomura maintained a Neutral rating but cut its target from $57 to $55.
• William Blair maintained a Market Perform rating.

The analysts demand a bit more from Nordstrom to merit a bullish turn.

“We believe greater fundamental stability is needed to drive shares, however, and prove the ultimate opportunity stemming from strategic customer engagement and more recently fulfillment advantages Nordstrom has built around its model, which should pay greater dividends as the industry continues to consolidate,” Carden wrote.

Nordstrom traded around $50.33 per share at time of publication Friday morning.

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