ANF Abercrombie and Fitch Co

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

 
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