Nordstrom: Is the Risk Worth The Reward?
Tuesday, March 1st, 2016
There are many retailers a person can choose to invest in, but only a few are what I would call top-tier or prime retailers. Nordstrom is one name that definitely fits into the prime retailer category, so I thought it would be a good time to see if this company is as great of a deal as their mid-year sale.
Nordstrom trades under the symbol JWN. The symbol comes from their founder, John W Nordstrom, who opened the store back in 1901 as a shoe business. It has since grown to 323 stores in 39 states, as well as 194 Nordstrom Rack stores.
The stock trades around $51/share, has a 52 week high of $83.16 and a low of $44.49. The company is headquartered in Seattle, Washington and has a current market value of just under $9 billion.
Starting with the valuation ratios, the price-to-earnings ratio looks good at 16.6, below the industry average of 18.8. Price-to-sales looks very attractive at 0.67, almost half the industry average of 1.13. Not so attractive is the price-to-tangible book value of 22.14, which is three times the industry average of 6.40.
Without doing a more thorough analysis, I assume the company doesn’t have a lot of tangible assets. Lastly, price-to-cash flow is 8.2, better than the industry at 10.2.
Investors will receive an annual dividend of around 2.8%, and the company only uses 35% of earnings to pay that. Over the last five years, the annual growth rate on the dividend is 14%.
Year-over-year for the last 12 months, sales have climbed 6.9% for Nordstrom, which is better than the industry average of 5.4%. Earnings however, on a per-share basis, have fallen by 14.7% when the industry experienced a growth of 2%.
If you own or are thinking of buying this company, I would encourage you to understand why sales increased yet earnings-per-share fell. It could be Nordstrom had too many sales that cut into the profits, but an investor needs to know for sure.
I was disappointed with the company's current ratio of 1.04, which is half the industry at 2.14. The current ratio is important to show the liquidity of the company and can pay their bills if business slows down.
The debt-to-equity was a huge surprise at 322%, versus the industry average of 57%. Normally I would tell you to run to the nearest exit with this much debt. However I looked deeper into what the company does, and they have their own federal savings bank called Nordstrom FSB.
This bank provides label credit cards for Nordstrom. Banking accounting is different, because what you may think is an asset is actually a liability, and that can raise the debt-to-equity. I believe this is the case here. If I were to invest in this company, I would want to understand how much of the high debt is due to the Nordstrom bank.
The profit margin for Nordstrom is currently at 4.2%, which is about 50% below the industry net profit margin of 6%.
It’s also important to look at the return on equity, because businesses can have lower profit margins due to higher turnover of their product. This appears to be the case here, with a return on equity of 36.2% for Nordstrom; far better than the industry average at 22.1%.
Receivable turnover should be checked at 12.0, compared to the industry at 23. Once again this could have something to do with the Nordstrom bank. Inventory turnover looks very good at 5.0, well above the industry at 3.3.
Nordstrom reports its earnings on the fiscal year basis, and looking forward two years would bring us to January 2018. There we find the average estimate of 16 analysts, with earnings-per-share of $3.68.
This tells me the stock has a forward PE of 13.9, which is above where I like to buy a company. I like to buy with a forward PE of 12 or less. The reason being using a 40 year average of the forward PE of 16.5, I come up with a target sell price of $60.72. Based on what the stock is currently trading at, that would only be a gain of 19%.
For me, that is not enough of a reward for the risk.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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