Nordstrom Privatization Plans On Hold
We think resuming the exploration after the holidays is a smart move, and we are maintaining our $53 fair value estimate.
The Nordstrom (JWN) family (owning just over 30% of shares) has announced that it has suspended efforts to take the company private for the remainder of this year. We believe this decision is driven by difficulty in completing a financing package for the deal, given risk-averse conditions (private-equity-backed Rue21, Payless Shoes, and Gymboree have filed for bankruptcy, Neiman Marcus is attempting to restructure, and J.Crew is struggling). That said, the family appears to intend to resume exploration following the holiday season, which we view as wise, given that holiday performance will remove some near-term performance uncertainty (fourth-quarter revenue accounted for 29% of the top line on an annual basis last year).
We still believe that Nordstrom possesses a narrow economic moat and competitive advantage, given the strength of its brand in defining customer service excellence and its niche, highly curated market positioning. Furthermore, the company also delivers exposure to the higher-growth off-price channel, with Nordstrom Rack accounting for almost one third of sales and posting mid-single-digit comparable sales growth over the past three years. Therefore, we still believe that a deal can be brokered and that current trading levels (13 times fiscal 2018 earnings versus a 16 times apparel retail price/earnings median and 9 times department store median) are unjustified. We are maintaining our $53 fair value estimate, which is based on 4% average annual top-line growth and only 1.5% average annual operating income growth over the next five years.
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Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.