Struggles Also Hit Nordstrom, but Profit Growth Intact
We still think Nordstrom is the best in class department store operator.
With an almost 1% comparable sales decline and only 3% sales growth, narrow moat Nordstrom’s (JWN) brick and mortar sales struggled like other department store peers. However, we note this weakness was already accounted for both in our full-year estimates calling for low-single-digit top-line growth and management guidance for a 3% to 4% increase in net sales for fiscal 2017. Furthermore, 7 basis points of retail gross margin expansion to 34.3% and only a 24-basis-point increase in the sales SG&A rate to 32% (with 2016 adjusted to exclude a $30 million non-operational charge), reaffirmed our belief that the company can achieve an overall operating margin in the 6% range in 2017 (versus roughly 6.6% last year excluding the goodwill impairment).
We continue to think that Nordstrom is best in class in the department store space with a correctly sized store base, superior customer service and store experience, and carefully curated product selection targeting a niche market. Therefore, we see little change in our estimates calling for about 4% average annual top-line growth over the next five years and operating margin remaining in the 6% range (with operational efficiencies offsetting e-commerce shifts). That said, we expect our $48 fair value estimate to increase $5 or $6 due to a lowered federal tax rate assumption, effective in fiscal 2018.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.