Who's Shopping For Nordstrom's Stock? The Street Debates

High-end department store chain Nordstrom, Inc. JWN reported a top- and bottom-line miss in its fourth-quarter earnings while management's outlook also fell short of expectations. Here is a summary of how some of the Street's top analysts reacted to the print.

The Nordstrom Analysts

Bank of America analyst Lorraine Hutchinson maintains an Underperform rating on Nordstrom's stock with a price target lowered from $29 to $27.

UBS analyst Jay Sole maintains at Sell, $30 price target.

Wedbush analyst Jen Redding maintains at Neutral, $36 price target.

Tigress Financial's Ivan Feinseth.

More Potential Downside

Nordstrom's stock has fallen 18% since the start of 2020 and Sole said shares have a path to fall as low as $14 under a bear-case scenario. Nordstrom remains a potential victim of the ongoing "disruptive forces" impacting the broader department store sector and this should result in continued sales and EBIT margin pressure.

Nordstrom's EBIT margin is down around 80 basis points annually for eight straight years and if this continues in 2020, it would result in a 30% drop in EPS, all other factors remaining equal.

"We think JWN's disappointing 4Q19 report indicates the probability of our bear case playing out has increased," the analyst wrote in a note.

Margin Expansion 'Delayed Again'

Hutchinson said Nordstrom's higher SG&A and lower credit was partly offset by stronger than expected sales growth of 1.3%. However, the company ended the year with a 50 basis point loss in 2019 EBIT margin at 5.4%, which was short of management's initial guidance of 5.9% to 6.1%.

Looking forward to 2020, management's EBIT outlook implies another year of no margin expansion, despite expectations for $200 to $250 million in cost savings, higher merchandise margins, loyalty program benefits, and lapping the opening of the New York City store.

Beyond 2020, management is also "backing away" from its 2022 EBIT margin target of 6.6% to 6.8%, which was set in 2018.

Related Link: 3 Analysts Review Nordstrom's Q3 Earnings

'Fair' Value For Long-Term

Redding said Nordstrom's stock is trading at a "fair" valuation for long-term deep value investors who are willing to give a new management team the benefit of the doubt. Nordstrom does have a strategy to grow through a localized market, a unique and limited distribution brand growth, and leveraging its "powerful" omnichannel.

The stock is trading at an implied 39% discount to its five-year historical P/E of 17.1 times and this is "fair." The research firm's $36 price target is based on 10.5 times 2020 EPS estimates of $3.43.

Ongoing Turnaround

Feinseth said Nordstrom's revenue growth of 1.2% in the quarter comes at a time when it is up against an "extremely competitive" retail environment. The company also introduced a handful of management changes, including naming Erick Nordstrom as CEO and reducing its board from 11 members to 10.

Nordstrom showed it continues to innovate in its business and introduce new retail concepts to emphasize its strong service-oriented business, Feinseth said. In fact, Nordstrom is expanding its physical presence when others contract, especially in New York City, the retail capital of the world.

"Nordstrom's business model capitalizes on the trend of in-store shopping and online purchasing by ramping up its omnichannel fulfillment capabilities and customer loyalty program," he wrote. "I believe Nordstrom is showing a turnaround in its business trends that should continue to drive further upside from current levels."

JWN Price Action

Shares of Nordstrom traded down 1.7% to $32.88 in Wednesday's session.

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