THINK TWICE BEFORE GOING TO THIS MALL STORE - JWN Stock

Introduction: Today we are going to be talking about Nordstrom (JWN) and are some items to watch out for when looking at this company. Obviously, this company (being a store typically in malls) had one of the biggest impacts on their sales and overall financials. I think that while it can be a turnaround play due to the valuation, it is important to understand their current financial position and where they may go. TLDR: I am going to wait a couple of quarters/year to see if this business is truly worth investing in. Currently, I think the business has more downside instead of upside. JWN - Nordstrom: “The Company was founded in 1901 as a retail shoe business in Seattle, Washington under the guiding principle that success would come by offering customers the very best service, selection, quality, and value. We aspire to be the best fashion retailer in a digitally-connected world by leveraging the strength of the Nordstrom and Nordstrom Rack brands. We offer an extensive selection of high-quality brand-name and private-label merchandise focused on apparel, shoes, beauty, accessories, and home goods for women, men, young adults, and children. In order to offer merchandise that our customers want, we purchase from a wide variety of high-quality domestic and foreign suppliers. We also have arrangements with agents and contract manufacturers to produce our private label merchandise. No matter how customers choose to shop, we are committed to delivering superior service, product, and experience, including alterations, order pickup, dining, and styling, to make shopping fun, personalized, and convenient.” 2020 10K Filing Nordstrom operates a higher-end retail fashion store both under Nordstrom and Nordstrom Rack where it sells both brand name and private label merchandise. One of the great advantages of having Nordstrom Rack sell at a more affordable price is that they are able to take whatever leftover inventory from the regular Nordstrom stores and finish out their inventory at the Nordstrom Rack. As of Q3 2021, they have three areas that they would like to focus their future opportunities on: “improving Nordstrom Rack performance, increasing profitability and optimizing our supply chain and inventory flow.” (Q3 2021 Filing pg. 17) A big portion of their growth opportunities will come from the Nordstrom Rack adoption rate and utilizing digital transformations to optimize their business. They serve customers at 100 full-line stores and 248 Nordstrom Rack locations in 40 U.S. states and Canada; two clearance stores; and five Nordstrom Local service hubs. Nordstrom breaks itself down into the following segments: Nordstrom This includes Nordstrom.com, TrunkClub.com, Nordstrom-branded U.S. stores, Canada, which includes Nordstrom.ca, Nordstrom Canadian stores, and Nordstrom Rack Canadian stores, and Nordstrom Local Nordstrom Rack This includes the NordstromRack.com, Nordstrom Rack-branded U.S. stores, Last Chance clearance stores https://preview.redd.it/bwgptmw21l681.png?width=736&format=png&auto=webp&s=b47bda69acb2734d49bd4443532b4aa8f7de3e64 Financials: Total Revenue TTM as of Q3 2021: $13.948B https://preview.redd.it/su0rsqw31l681.png?width=782&format=png&auto=webp&s=c8c47db84d384957b214499d322eaa364b5fae6a The profit Margin was floating between ~2% - 3% before the pandemic happened. They just recently came back to a positive profit margin. https://preview.redd.it/53gxe6j41l681.png?width=780&format=png&auto=webp&s=b321a8cd85f826ae52da948356ba5952b394d4a1 Current P/E: ~293 This is due to the huge hit to their net income over the last year and a half. They have a forward P/E on Yahoo finance of 9.55. EV/EBITDA: ~7.61 Current Cash as of Q3 2021: $267M Inventory of $2.863B Total Debt as of Q3 2021: $2.851B Non-Current operating lease liability: $1.602B https://preview.redd.it/8e5wwf851l681.png?width=737&format=png&auto=webp&s=51815063fb40c13eecbf58e086e11a1d3bdef5c4 Industry According to McKinsey.com, “Travel has traditionally been a key driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024.” Also, the recovery will be uneven between all of the retailers and the ongoing supply chain issues. Many of the companies are having employee retainment issues on both the corporate and retail sides of the business. Now they did note that social shopping and the surge of social media use allows brands to connect to consumers at a more intimate level. McKinsey recommends that companies should double down on integrating the online shops with users' phones and apps in mind so that they build out data to find what their customers want. Lastly, I would like to point out that over the last year and a half we have had a lot of free money due to stimulus checks and the deferment of student loan payments. This gave many consumers a lot of free money to spend on whatever they may have wanted. While I do think people will still buy at retailers’ stores it is important to watch the consumers’ money supply and how much they have to spend on products. Part of this also comes from looking at the amount of credit the consumers are using.. Strengths: Brand Name and reputation - Nordstrom is a very well-known brand in the fashion industry and with the average consumer. This can be seen in their social media growth especially on Instagram. This is really one of the legacy brands in modern fashion so people tend to trust the company and continue to buy both private label and branded products. Digital Growth One of the main points made in their 10Q for Q3 2021 is the need to become more of a data-driven company. They are doing this by implementing more data features within their app and through their online store. This will allow them to pivot faster and continue to deliver products that customers truly want. ~Large Physical footprint in malls or shopping centers Nordstrom is one of the fashion retailers that actually has many physical stores across a lot of malls. While I think this is a strength for those who want to get back to the mall, the higher mall rents and contracts will continue to eat into their bottom line. Also, if a lot of new customers are buying online rather than in stores, this will quickly turn into a huge business liability. So when you are looking at this company make sure to check what their in-store sales are doing and just the overall mall business as a whole for other companies as well. I think that their stores in fashion outlets like Nordstrom rack can provide a better opportunity rather than a full-on shopping mall. Risks: Current Leverage position As mentioned earlier they have a lot of debt on their balance sheet, especially when compared to their small cash size. They could liquidate their inventory to cover this, but if the company reached that point it would be spiraling down anyways. There may come a point where the risk to reward on this may be worth it, but for me personally, the debt combined with the glum outlook makes me want to sit on the sidelines longer to see how the business does over the next year. https://preview.redd.it/6xqeqjr61l681.png?width=737&format=png&auto=webp&s=d6a4a92caf80f3755d79141f66e063835106c1c2 People paying for student loans and not deferring house payments or stimulus checks It is obvious that many have been spending much more over the last year or so and a big component of that is the stimulus checks and student loan deferment. You can see that the chart below shows the spending over the last few quarters (link). This is definitely something you want to watch especially if there is any recession or reversion back to less consumer credit and overall spending happening. While this is more macro than some of the other points in this article is an important fact to point out because JWN should be firing on all cylinders this year if it benefits from the mass increase in consumer spending. Also, this may push some to buy from the Nordstrom Rack brand rather than the Nordstrom brand. https://preview.redd.it/7gvusk881l681.png?width=969&format=png&auto=webp&s=2f3e5b7bc2ef931104b6a5970eba350c1b70547e Declining Mall Business This would not be a complete article about a large mall-based store if we did not talk about the decline in mall business overall. An article from pymnts.com pointed out “Data from Placer.ai show that foot traffic was down 6.5% at indoor malls in September compared to 2019 and down 5.2% at outdoor malls. That’s a less steep decline than six months ago when indoor mall foot traffic was down 21% and outdoor was down 8.4%, but it’s a fall nonetheless. In the past six months, only July has seen an increase in mall traffic — 1% for indoor shopping centers and 1.8% for outdoor” (Link). This foot traffic is also hit by the lack of international tourism. This is definitely something you want to watch over the next couple of quarters for a company like Nordstrom. Increased Supply and Labor cost Lastly, inflation will definitely hurt a company like Nordstrom because they are not going to be able to pass every cost onto its consumer. The input costs like shipping and supplies have gone up significantly along with the cost of labor and just turnover in general. The costs from these factors will hurt the bottom line of the company as long as we are in the current environment. Discounted Free Cashflow Model If you would like to see my worksheet the link is here. https://preview.redd.it/6cebcz691l681.png?width=794&format=png&auto=webp&s=ad8385cc9e36cb949ea95b9011ec98cf9fab0906 https://preview.redd.it/f5bntpr91l681.png?width=769&format=png&auto=webp&s=16a1fae4b9c3470bdae7bcc4900117dff289f6a5 Closing Thoughts: The valuation may be looking favorable based on the assumption listed in the DCF above, but I do not think the business risks outweigh the valuation currently. From a risk to reward perspective you are hoping they can turn around the business when their enterprise value is nearly double their market cap. I think that the debt along with the capital leases will not allow them to have margin expansion like some of their e-commerce counterparts. If you believe in this turnaround play it could be an opportunity to look into more, but for me personally, I am waiting until I see the turnaround or if the valuation falls to a large margin of safety beyond the current price.

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THINK TWICE BEFORE GOING TO THIS MALL STORE - JWN Stock

bullish

Introduction:

Today we are going to be talking about Nordstrom (JWN) and are some items to watch out for when looking at this company. Obviously, this company (being a store typically in malls) had one of the biggest impacts on their sales and overall financials. I think that while it can be a turnaround play due to the valuation, it is important to understand their current financial position and where they may go.

TLDR: I am going to wait a couple of quarters/year to see if this business is truly worth investing in. Currently, I think the business has more downside instead of upside.

JWN - Nordstrom:

“The Company was founded in 1901 as a retail shoe business in Seattle, Washington under the guiding principle that success would come by offering customers the very best service, selection, quality, and value. We aspire to be the best fashion retailer in a digitally-connected world by leveraging the strength of the Nordstrom and Nordstrom Rack brands. We offer an extensive selection of high-quality brand-name and private-label merchandise focused on apparel, shoes, beauty, accessories, and home goods for women, men, young adults, and children. In order to offer merchandise that our customers want, we purchase from a wide variety of high-quality domestic and foreign suppliers. We also have arrangements with agents and contract manufacturers to produce our private label merchandise. No matter how customers choose to shop, we are committed to delivering superior service, product, and experience, including alterations, order pickup, dining, and styling, to make shopping fun, personalized, and convenient.” 2020 10K Filing

Nordstrom operates a higher-end retail fashion store both under Nordstrom and Nordstrom Rack where it sells both brand name and private label merchandise. One of the great advantages of having Nordstrom Rack sell at a more affordable price is that they are able to take whatever leftover inventory from the regular Nordstrom stores and finish out their inventory at the Nordstrom Rack. As of Q3 2021, they have three areas that they would like to focus their future opportunities on: “improving Nordstrom Rack performance, increasing profitability and optimizing our supply chain and inventory flow.” (Q3 2021 Filing pg. 17) A big portion of their growth opportunities will come from the Nordstrom Rack adoption rate and utilizing digital transformations to optimize their business. They serve customers at 100 full-line stores and 248 Nordstrom Rack locations in 40 U.S. states and Canada; two clearance stores; and five Nordstrom Local service hubs.

Nordstrom breaks itself down into the following segments:

  • Nordstrom
    • This includes Nordstrom.com, TrunkClub.com, Nordstrom-branded U.S. stores, Canada, which includes Nordstrom.ca, Nordstrom Canadian stores, and Nordstrom Rack Canadian stores, and Nordstrom Local
  • Nordstrom Rack
    • This includes the NordstromRack.com, Nordstrom Rack-branded U.S. stores, Last Chance clearance stores



Financials:

  • Total Revenue TTM as of Q3 2021: $13.948B



  • The profit Margin was floating between ~2% - 3% before the pandemic happened. They just recently came back to a positive profit margin.



  • Current P/E: ~293
    • This is due to the huge hit to their net income over the last year and a half. They have a forward P/E on Yahoo finance of 9.55.
  • EV/EBITDA: ~7.61
  • Current Cash as of Q3 2021: $267M
    • Inventory of $2.863B
  • Total Debt as of Q3 2021: $2.851B
    • Non-Current operating lease liability: $1.602B



Industry

  • According to McKinsey.com, “Travel has traditionally been a key driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024.” Also, the recovery will be uneven between all of the retailers and the ongoing supply chain issues. Many of the companies are having employee retainment issues on both the corporate and retail sides of the business. Now they did note that social shopping and the surge of social media use allows brands to connect to consumers at a more intimate level. McKinsey recommends that companies should double down on integrating the online shops with users' phones and apps in mind so that they build out data to find what their customers want. Lastly, I would like to point out that over the last year and a half we have had a lot of free money due to stimulus checks and the deferment of student loan payments. This gave many consumers a lot of free money to spend on whatever they may have wanted. While I do think people will still buy at retailers' stores it is important to watch the consumers' money supply and how much they have to spend on products. Part of this also comes from looking at the amount of credit the consumers are using..

Strengths:

  1. Brand Name and reputation -
    1. Nordstrom is a very well-known brand in the fashion industry and with the average consumer. This can be seen in their social media growth especially on Instagram. This is really one of the legacy brands in modern fashion so people tend to trust the company and continue to buy both private label and branded products.
  2. Digital Growth
    1. One of the main points made in their 10Q for Q3 2021 is the need to become more of a data-driven company. They are doing this by implementing more data features within their app and through their online store. This will allow them to pivot faster and continue to deliver products that customers truly want.
  3. ~Large Physical footprint in malls or shopping centers
    1. Nordstrom is one of the fashion retailers that actually has many physical stores across a lot of malls. While I think this is a strength for those who want to get back to the mall, the higher mall rents and contracts will continue to eat into their bottom line. Also, if a lot of new customers are buying online rather than in stores, this will quickly turn into a huge business liability. So when you are looking at this company make sure to check what their in-store sales are doing and just the overall mall business as a whole for other companies as well. I think that their stores in fashion outlets like Nordstrom rack can provide a better opportunity rather than a full-on shopping mall.

Risks:

  1. Current Leverage position
    1. As mentioned earlier they have a lot of debt on their balance sheet, especially when compared to their small cash size. They could liquidate their inventory to cover this, but if the company reached that point it would be spiraling down anyways. There may come a point where the risk to reward on this may be worth it, but for me personally, the debt combined with the glum outlook makes me want to sit on the sidelines longer to see how the business does over the next year.



  1. People paying for student loans and not deferring house payments or stimulus checks
    1. It is obvious that many have been spending much more over the last year or so and a big component of that is the stimulus checks and student loan deferment. You can see that the chart below shows the spending over the last few quarters (link). This is definitely something you want to watch especially if there is any recession or reversion back to less consumer credit and overall spending happening. While this is more macro than some of the other points in this article is an important fact to point out because JWN should be firing on all cylinders this year if it benefits from the mass increase in consumer spending. Also, this may push some to buy from the Nordstrom Rack brand rather than the Nordstrom brand.



  1. Declining Mall Business
    1. This would not be a complete article about a large mall-based store if we did not talk about the decline in mall business overall. An article from pymnts.com pointed out “Data from Placer.ai show that foot traffic was down 6.5% at indoor malls in September compared to 2019 and down 5.2% at outdoor malls. That's a less steep decline than six months ago when indoor mall foot traffic was down 21% and outdoor was down 8.4%, but it's a fall nonetheless. In the past six months, only July has seen an increase in mall traffic — 1% for indoor shopping centers and 1.8% for outdoor” (Link). This foot traffic is also hit by the lack of international tourism. This is definitely something you want to watch over the next couple of quarters for a company like Nordstrom.
  2. Increased Supply and Labor cost
    1. Lastly, inflation will definitely hurt a company like Nordstrom because they are not going to be able to pass every cost onto its consumer. The input costs like shipping and supplies have gone up significantly along with the cost of labor and just turnover in general. The costs from these factors will hurt the bottom line of the company as long as we are in the current environment.

Discounted Free Cashflow Model

If you would like to see my worksheet the link is here.





Closing Thoughts:

The valuation may be looking favorable based on the assumption listed in the DCF above, but I do not think the business risks outweigh the valuation currently. From a risk to reward perspective you are hoping they can turn around the business when their enterprise value is nearly double their market cap. I think that the debt along with the capital leases will not allow them to have margin expansion like some of their e-commerce counterparts. If you believe in this turnaround play it could be an opportunity to look into more, but for me personally, I am waiting until I see the turnaround or if the valuation falls to a large margin of safety beyond the current price.

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7 min
21.39
Target Price
4/ 10
Confidence
6-12 Months
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