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As Nordstrom Prepares To Launch More 'Rack' Stores, Keep An Eye On Canadian Comps

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As Nordstrom Prepares To Launch More 'Rack' Stores, Keep An Eye On Canadian Comps

Following the release of first-quarter results by Nordstrom, Inc. (NYSE: JWN), Baird said lower comps at its Canadian stores could be weighing on growth — a trend that should be watched, as the company prepares to launch Rack stores in Canada, beginning next year.

Canadian Worries

The firm noted Nordstrom generated about $300 million of sales in Canada last year and is targeting a $1 billion opportunity over time, including the rollout of Rack stores beginning next year. The firm estimates Canada represents about half of the sales consolidated in "other line," with Trunk Club, Jeffrey boutiques and Last Chance outlets.

The firm thinks Vancouver is performing well, but lower "comps" in the first three stores along with potentially lower productivity in Toronto due to lower awareness, more competitive market could be weighing on growth.

Q1 Print

Analyst Mark Altschwager noted the company reported first-quarter earnings of $0.37 per share, ahead of the consensus estimate, as lower SG&A more than offset weaker-than-expected comps and gross margin. Channel shifts continue, with full-line comps declining 2.3 percent, while online and off-price comps rising 10.9 percent and 2.3 percent, the analyst said.

Outlook

While noting the company reaffirmed its annual earnings per share guidance, Baird raised its estimate, to reflect the first-quarter upside, partly offset by more conservative margin assumption for the balance of the year.

The firm expects retail EBIT at $820 million, slightly above the mid-point of the guidance of $780 million to $840 million. Baird termed the guidance as embedding an element of conservatism.

"However, with rapid channel shift to ecommerce, deleverage at full-line stores, expansion in expensive new markets (Canada, Manhattan), and ongoing investments to support a best-in-class consumer experience, where retail-EBIT margin ultimately levels out is still anyone's guess — warranting a cautious stance on shares," the firm said.

As such, Baird maintains its Neutral rating and $50 price target for the shares of Nordstrom even as it raised its estimates for the company slightly.

With the stock declining steeply in reaction to the results, Baird said, though the results weren't too bad given the tough backdrop, the bar appeared higher for Nordstrom following strong recent share performance.

Therefore, the firm said a comp/gross margin miss may not be enough to satisfy elevated expectations.

At time of publication, shares were down 9.8 percent at $41.68.

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Image Credit: By Dllu (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Latest Ratings for JWN

DateFirmActionFromTo
Aug 2019MaintainsEqual-Weight
Aug 2019ReiteratesUnderperform
Aug 2019MaintainsOverweight

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