More than nine months ago, Nordstrom (NYSE:JWN) announced that six members of the founding family -- several of whom currently serve in senior management roles -- were exploring the possibility of taking their namesake company private. However, the Nordstrom family failed to line up financing last fall.
When a bid finally came earlier this month, it was for just $50/share -- less than Nordstrom's stock price at the time. Not surprisingly, the special committee of independent directors tasked with evaluating the bid rejected it.
The fact that the initial offer was so low made it pretty clear that the Nordstrom family was never going to make a reasonable bid. Sure enough, the company announced on Wednesday that the special committee had terminated the buyout discussions.
Based on the special committee's statement, it appears that the Nordstrom family wasn't willing to raise its bid from the $50/share it initially offered -- or at least not by much.
The family argued that this price represented a 24% premium over the stock price as of last June, when the possibility of a buyout was first announced. However, the overall retail sales environment has improved significantly since then, while the corporate tax rate has been reduced. Indeed, Nordstrom posted a 2.6% comp-sales increase for the fourth quarter, far better than the 0.8% Q1 comp-sales decline it reported last May.
In this context, $50 doesn't seem like a particularly generous offer. Indeed, even with the buyout idea squelched, Nordstrom stock still traded for more than $48 as of 12 p.m. EDT on Wednesday.
Nordstrom doesn't need a buyout
Proponents of a go-private deal have claimed that most shareholders don't have the patience to let Nordstrom make the long-term investments it needs to stay competitive with the likes of Amazon.com. With Nordstrom stock currently trading about 40% below its all-time high, this might seem like a compelling argument.
However, as I have previously argued, shareholders are mainly dissatisfied with Nordstrom's poor execution, not its growth-oriented investments. For example, while other off-price retailers have thrived in recent years, recurring inventory-management problems have undermined comp-sales growth in Nordstrom Rack stores.
Furthermore, investors have driven Amazon to a valuation of more than $750 billion, despite the company's penchant for massive investments and its erratic profitability. While Amazon is an outlier, it isn't a unique case. Nordstrom stock surged during 2014 and early 2015, even as profitability began to recede. It was only in late 2015 -- when revenue growth slowed dramatically -- that Nordstrom stock crashed.
Nordstrom family members in senior leadership roles with the company have told investors that the massive investments of the past few years will start paying off soon. If that's true, there's no reason to take a lowball buyout offer. (If it's not true, then poor management by the Nordstrom family -- not public-company status -- would seem to be Nordstrom's real problem.)
During 2018, the main task for Nordstrom is to maintain the sales momentum that began over the holiday season and begin capitalizing on previous investments. Management expects adjusted earnings per share to reach $3.30-$3.55, up from $2.90 in 2017. A lower tax rate and stronger underlying performance should more than offset the negative impact of a recent change in accounting rules.
Nordstrom also should restart its share-buyback program soon after suspending it due to the pending bid by the founding family. The company had $1.2 billion of cash on hand at the end of the fiscal year, up from $1.0 billion a year earlier, and just $595 million the year before that.
Given that Nordstrom consistently produces free cash flow, buybacks are a good way for the company to take advantage of dips in the stock price and reward investors for their patience. A steady pace of share buybacks and the maturing of Nordstrom's investments should drive strong earnings-per-share growth over the next several years, pushing Nordstrom stock far beyond the $50 level.