Nordstrom Lacks Cash

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Retail stocks are getting sliced up and fried like shrimp on a grill. After disappointing earnings from department store J.C. Penney (NYSE: JCP) and upscale retailer Liz Claiborne (NYSE: LIZ), it shouldn't be any surprise that Nordstrom (NYSE: JWN) failed to escape the general malaise. However, Nordstrom is facing what could be a much bigger, company-specific land mine that could really cause problems if the economy goes from bad to only slightly worse.

Last quarter's sales decline of 8.3% to $165 million certainly wasn't pretty. Nor were earnings that came in at half of last year's levels -- $0.33 per share versus $0.69 in 2007.

That's not the red flag though. Rising interest expenses and a troublesome dip in cash on hand are worrisome signs of a potential cash crunch. And given the current market environment, the last thing any company needs is a major cash shortage.

Running out of money?
Nordstrom's debt-to-equity ratio was 2.28 as of last quarter, up from 0.29 just a couple of years ago. That means the company is having to get used to larger-than-normal interest payments that could eventually chew into the bottom line. And although debt levels aren't wildly excessive, shareholder equity has also seen a steep decline.

In addition, other parts of the balance sheet foster concern. Nordstrom has $68 million in cash on hand, versus $108 million last year. The accounts receivable figure is higher by $184 million. (On the surface a high accounts receivable number may seem like a plus, but you can't pay your bills with IOUs.) Current liabilities and long-term debt are also higher than year-ago levels, as are interest expenses.

Granted, the problem doesn't seem to be immediate. If holiday shopping is even halfway decent this year, the resulting cash flow should help replenish that flagging cash balance. After the holiday rush, however -- when retail sales historically fall off a cliff -- the company may really start feeling the costs of higher debt-service expenses and weakened margins. That could put Nordstrom in a hole it won't easily crawl out of.

If you're looking for a retailer with less debt and interest expense vulnerability, take a look at Kohl's (NYSE: KSS) and the often-forgotten Men's Wearhouse (NYSE: MW). They're tightly run ships, with Kohl's interest expense making up just 2% of gross profits. Men's Wearhouse averages just 0.4%. For comparison, Nordstrom's interest expense figure clocks in at 5.3% of gross profits -- which is quite a bit when your net margins are so narrow.

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