In this article, let's take a look at Nordstrom Inc. (JWN, Financial), a $15.54 billion market cap company that is a specialty retailer of apparel and accessories, widely known for its emphasis on service, which operates some 290 stores in 38 states.
Plans to increase
Nordstrom is a well-known leader in the department store business, and it has become famous due to its high quality and fashionable products. The retailer focuses more on apparel, footwear and fashion accessories, all categories that have more attractive margins than others. We can highlight that it has not entered in promotions, so there was no need to cheapen its brands.
Nordstrom had 119 full-line stores and 167 Nordstrom Rackstores as of March 2014. The Nordstrom full-line and online stores provide customers with a consistent merchandise assortment across channels. It plans to increase Rack doors to 230 by 2016.
Internet development
The firm is investing heavily in its online capabilities, making investments in technology. It has made efforts to attract younger customers with different offerings and focuses on promoting the online shopping as well as the addition of WiFi to all stores.
A shopping website for men
In August 2014, the company purchased the Chicago-based menswear service Trunk Club, a personalized clothing service for men, for $350 million in stock. The deal included an incentive plan up to $100 million in long-term incentives for management. The transaction is expected to be EPS dilutive by 3% to 5%, according to management.
Revenues, margins and profitability
Looking at profitability, revenues rose by 8.94% but earnings per share decreased in the fourth quarter compared to the same quarter a year ago ($1.32 vs $1.37). During the past fiscal year, EPS remained unchanged from the prior years' EPS, at $3.72. This year, Wall Street expects an improvement in earnings ($3.78 versus $3.72).
Although we consider that the gross profit margin is high, at 41.58%; it has decrease from the same period last year. Net Margin of 5.33% is ranked higher than 83% of the 1280 Companies in the Global Department Stores industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| JWN | Nordstrom | 32.93 |
| FDO | Family Dollar Stores Inc | 15.20 |
| DDS | Dillards Inc | 16.57 |
| JCP | JC Penney Co Inc | -21.60 |
| M | Macy´s | 26.42 |
| Â | Industry Median | 8.73 |
The company has a current ROE of 32.93% which is higher than the industry median. Also, is higher than the one exhibit by Dillards (DDS, Financial) and JC Penney (JCP, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Family Dollar (FDO, Financial) and Macy's (M, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Jan-06 | 28.41 |
| Jan-07 | 29.00 |
| Jan-08 | 30.00 |
| Jan-09 | 31.00 |
| Jan-10 | 32.00 |
| Jan-11 | 33.00 |
| Jan-12 | 34.00 |
| Jan-13 | 35.00 |
| Jan-14 | 36.00 |
| Jan-15 | 37.00 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 21.51x, trading at a discount compared to an average of 28.4x for the industry. To use another metric, its price-to-book ratio of 6.22x indicates a premium versus the industry average of 2.40x while the price-to-sales ratio of 1.14x is above the industry average of 0.91x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $22.325, which represents a17.4% compound annual growth rate (CAGR).
Final comment
A key point to success was the ability to turn goods quickly while being fashionable. For the near future, we are expecting that the company will operate more full-line stores. Further, we continue believe that the growth will come from new channels such as the Rack stores.
The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund guru Jim Chanos (Trades, Portfolio) bought the stock, while Stanley Druckenmiller (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) have added this stock to their portfolios in the fourth quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
