ANF Abercrombie and Fitch Co

We have maintained our long-term 'Neutral' recommendation on Nordstrom Inc. (JWN) with a target price of $48.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock.

Nordstrom is one of the leading players in the extremely fragmented specialty retail sector. The company offers a broad array of over 500 brands, targeted toward the entire family, through a strong nationwide network of 204 stores situated across 28 states. The company has a strong line up of globally recognized brands, catering primarily to the upscale segment, enabling Nordstrom to generate high margin revenue. Consequently, this provides a competitive advantage to the company and bolsters its well-established position in the market.

Moreover, the acquisition of online private sale leader HauteLook Inc. will help Nordstrom in building multi-channel retailing. The acquisition will facilitate the company to increase its direct business capabilities, implement enterprise-wide inventory management system, sell directly to online customers and enhance the company’s customer service.

In addition, Nordstrom's operations are based on a variable cost business model and approximately 40% to 45% of selling, general and administrative expenses are variable in nature. This flexible cost structure not only helps the company to mitigate the impact of sluggish sales trends on margins, but also enables it to quickly capitalize on the emerging opportunities when market conditions recover. Consequently, Nordstrom can expect a steady improvement in profitability moving forward.

Furthermore, the company's fiscal 2010 earnings of $2.75 per share surpassed the Zacks Consensus Estimate of $2.71, increasing 36.8% from $2.01 posted in the prior-fiscal, primarily driven by strong top-line growth and improved margins. Bolstered by better-than-expected annual performance, Nordstrom expects full-year 2011 earnings in the range of $2.95 to $3.10 per share and sales per square-foot of over $400.0 million.

However, consumer's confidence and spending behavior may dampen due to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels,which may negatively affect their disposable income, and in turn, the company’s growth and profitability.

Above all, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players, such as Gap Inc. (GPS), Limited Brands Inc. (LTD) and Abercrombie & Fitch Co. (ANF). The company primarily competes on the basis of fashion, quality and service. To retain the existing market share, the company may resort to aggressive pricing, which could affect its margins.

 
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