Neutral on Nordstrom - Analyst Blog
June 08 2011 - 4:15AM
Zacks
We maintain our long-term ‘Neutral’
recommendation on Nordstrom Inc. (JWN). Nordstrom
is a leading fashion specialty retailer in the U.S., offering high
quality apparel, shoes, cosmetics and accessories for men, women
and kids. The company offers both branded and private label
merchandise, which are positioned in the upscale segment of the
industry and targeted toward the aspiring middle class.
Moreover, 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.
Moreover, Nordstrom 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.
Additionally, in March 2011,
Nordstrom acquired the online private sale leader HauteLook Inc.,
which is expected to help the company in building multi-channel
retailing. The acquisition will facilitate Nordstrom to increase
its direct business capabilities, implement enterprise-wide
inventory management system, sell directly to online customers and
enhance the company’s customer service.
Furthermore, Nordstrom’s operations
are based on a variable cost business model and approximately 40%
to 45% of selling, general and administrative expenses are volatile
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 rapidly capitalize on the emerging opportunities
when market conditions recover. Consequently, Nordstrom can expect
a steady improvement in profitability moving forward.
On the flip side, 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 its existing market share,
the company may have to reduce its sales prices, which could affect
its margins.
Moreover, Nordstrom’s business is
seasonal in nature and generates a high proportion of sales during
the second and fourth quarters, which are scheduled to be period of
the company’s anniversary sale and holiday seasons. As a result,
Nordstrom is exposed to significant risks provided the seasons fail
to deliver expected operating performance.
Also, 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.
The company has a Zacks #3 Rank,
implying a short-term 'Hold' rating on the stock
ABERCROMBIE (ANF): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
LIMITED BRANDS (LTD): Free Stock Analysis Report
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