Nordstrom Q3 Reactions Range From 'Low Growth Outlook' To 'Best-Positioned' Retailer

Nordstrom, Inc. JWN reported third-quarter results that came in better than expected. Despite the stock's 20% gain in Wednesday's session, some analysts aren't convinced the report signals high-end fashion retailer could see better days ahead.

Nordstrom reported quarterly earnings of 22 cents per share, which beat the analyst consensus estimate by 28 cents. Sales came in at $3.089 billion versus $3.672 billion in the same quarter last year.

The Analysts: Credit Suisse analyst Michael Binetti maintains a Neutral rating on Nordstrom's stock with a price target lifted from $17 to $26.

Morgan Stanley analyst Kimberly Greenberger maintains an Equal-Weight rating on Nordstrom with an unchanged $19 price target.

UBS analyst Jay Sole maintains a Sell rating on Nordstrom with an $11 price target.

KeyBanc Capital Markets analyst Edward Yruma maintains an Overweight rating on Nordstrom with a $30 price target.

Disappointing Quarter? Nordstrom's third-quarter revenue fell 16% year-over-year to $3.089 billion and this was worse than the 14% decline expected, Binetti wrote in a note. Despite being up against low expectations, other key metrics fell short of estimates.

For example, Binetti said digital sales were only higher by a mid-teen percent year-over-year and this was "well below" peers. Underlying store sales are still trending down in the mid-40 percentage range which is also worse than rivals.

Rack's sales were "particularly disheartening" at down 32% as it's the only off-price retailer with a strong online channel that can offset store closures. However, there is reason to believe Nordstrom has "moved through the worst" of the COVID-19 disruption and the retailer could prove to be a winner as part of a "re-open trade."

Conference Call Highlights: Nordstrom's post-earnings conference call was highlighted by three key points that suggest the company has a brighter long-term outlook, Greenberger said:

• Management noted it saw a strong Anniversary Sale event that resulted in record sell-through rates. The company also deserves credit for adjusting its inventory to focus on comfort, home and casual wear.
• Nordstrom's continued investments in a local market strategy in key markets allow the company to better compete on service rather than price. Recent new initiatives include pickup online orders at nearly 350 Nordstrom and Nordstrom Rack locations in the U.S.
• Nordstrom has generated $550 million in cash savings (net of COVID charges) since the start of 2020 and the company is on track to reach the high-end of its prior target of $750 million in savings.

Biggest Share Loss In Years: Nordstrom appears to be on track to end 2020 with its largest market share loss versus rivals in at least nine years, Sole said. Nordstrom has lost share as clients shifted to online pureplay channels or off-price retailers that offer superior value-for-money propositions.

These negative trends may have been apparent in the third quarter as its sales growth rate underperformed the Softlines peer category by 800 basis point. Management's fourth-quarter guidance implies its growth rate will lag the average by 1,500 basis points.

Nordstrom could experience a near-term rebound, but Sole said investors are likely ignoring signs of longer-term problems. Most notably, management's back half outlook for 2021 is not "looking as easy as once thought" and a "low growth outlook" justifies a bearish stance.

"We think the forces working against JWN are bigger than just fashion trends," the analyst wrote in a note.

'Best-Positioned' In Reopening: Nordstrom exited the quarter with a "clean" and "fresh" inventory assortment that positions the company well into the holiday season, Yruma wrote in a note. Management deserves credit for shifting its focus to categories that are relevant in today's environment.

Meanwhile, management's $550 million in cost savings to date includes $330 million from operating expenses. The improved cost structure should continue into 2021, making Nordstrom one of the "best-positioned names in a reopening scenario" as apparel demand regains momentum.

JWN Price Action: Shares of Nordstrom were trading higher by more than 19% at $29.33.