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This Dead Money Has A Pulse

Posted: Nov 20, 2008 07:50 AM by Ryan C. Fuhrmann

Tickers in this Article: TJX, TGT, SKS, JWN

Upscale department store Nordstrom's (NYSE:JWN) impressive six-year string of same-store sales increases will officially come to an abrupt end when its fiscal year ends in January. Comps, which reached a lofty increase of 8.5% back in fiscal 2004, are projected to fall up to 16% during the fourth quarter and 10% for the full year, showing the rapid pace of the retail deterioration this year.

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Retail sales trends have been in freefall, and until they stabilize, Nordstrom looks like dead money. Of course, that could mean now is the perfect time to begin to nibble.

Retail Rotten to the Core
Before the credit crisis turned domestic consumer confidence on its head, the logic was that high-end retailers would hold up well given that wealthy individuals were less susceptible to economic downturns. Unfortunately, recent trends at Nordstrom and arch rivals Neiman Marcus and Saks (NYSE:SKS) are emphatically proving otherwise. Nordstrom reported an 8.4% decrease in third-quarter sales to $1.8 billion on an 11.1% drop in comps, with particular weakness in its full-line stores, which specialize in apparel and footwear and account for the bulk of total stores and retail square footage at the company. (Read about this key indicator in Consumer Confidence: A Killer Statistic.)

Strength from Unfamiliar Places
The company also operates 56 Nordstrom Racks, and though it doesn't break out total Rack sales individually, it did report that comps grew 3.6% in the three months ending November 1 compared to the same time period last year. This helped it "outperform its off-price competition" such as Neiman Marcus Last Call and TJX's (NYSE:TJX) Marshalls and TJ Maxx stores. Online sales also grew a respectable 8.5%, but neither segment helped temper the overall top-line difficulties as Nordstrom reported a 51% drop in earnings to 33 cents per diluted share as gross profit fell substantially and selling, general and administrative expense (SG&A) grew to 31.4% of total sales.

It is worth noting that Nordstrom also runs its credit card business, which is run primarily for the benefit of its customers and has not been a huge profit center in recent years. Total finance income came in at only $341 million last year, and while third quarter charge-offs reached 5.7%, is not overly alarming given that peers such as Target (NYSE:TGT) are seeing current writeoffs reach high single-digit percentages.

Weathering the Storm
As with nearly every retailer, management mentioned controlling what it can, namely inventory and variable costs. It also suspended its share repurchase program and is slowing capex by cutting new store openings and existing store relocations or remodeling. The initiatives appear to be helping: year-to-date operating cash flow is positive, and interest expenses decreased slightly from last year's levels.

Endurance is the key attribute right now. Nordstrom lowered its full-year earnings per share expectations to $1.87-$1.97, or down about 26% from original guidance. That puts the forward P/E at a seemingly compelling 6 times, if we forget the fact that there is little visibility as to when sales trends will stabilize. Until that happens, Nordstrom, like other leading brands in the retailing industry, will remain dead money. Of course, the downward trends will reverse themselves eventually and the stock will likely move before tangible signs of a turnaround are visible. As such, the best advice may be to start nibbling on the stock, if you haven't already.

For more on evaluating these types of companies, check out Analyzing Retail Stocks.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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