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Is Nordstrom a Buy Ahead of Earnings?

By Anne Burdakin – Feb 28, 2020 at 9:30AM

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Looking for diamonds in the fashion retailing rubble is worth the effort.

Seattle-based fashion specialty retailer Nordstrom (JWN 3.16%) is notable for its ability to adapt to changing consumer demands and economic conditions over its 119 years in operation. The digital age has challenged the brand but hasn't beaten it, even as it sticks with its brick-and-mortar stores.

Adaptation has been the name of the game for retailers since the rise of the internet. Some fashion retailers, like Macy's, are struggling and closing stores, while others, such as Barneys, have closed altogether.

When Nordstrom earnings are released Tuesday, March 3, a bright spot in the retail gloom could very well emerge.

Meet the customers where they are

Nordstrom's omnichannel business is an enviable one that other retailers should study. Co-President Erik Nordstrom sees shopping as a blended experience for the consumer, seamlessly integrating online and in-store experiences. "I've yet to have a customer use the word 'channel' with me," he said. "They don't do that. Those lines are completely blurred."

Woman online shopping on her phone while in a store

Source: Getty Images.

Nordstrom's avenues for connection with customers are:

  • Traditional brick-and-mortar locations serve customers at 117 full-line stores. The company just finished building a flagship seven-story full-line store in Manhattan.
  • Nordstrom Rack, the off-price stores, now number 250.
  • Nordstrom Local, expanding from New York and Los Angeles to other metropolitan cities, is strictly service: fittings, alterations, styling, order pickups, and returns. Additionally, anything you order from a nearby Nordstrom can be brought to your Local store in a few hours.
  • Nordstrom's online channels are Nordstrom.com, Nordstromrack.com, and private sale site Hautelook.com.

Nordstrom covers the bases when it comes to touching customers, while simultaneously benefiting the company by streamlining inventory movement.

For example, Nordstrom Local customers in New York have faster access to inventory across eight full-line stores. Co-President Erik Nordstrom said, "This represents seven times more selection available for same-day pickup or next-day delivery. Leveraging existing store assets and digital capabilities enable us to implement the shared inventory approach, without making additional material investments."  

Third-quarter 2019 results showed increasing digital sales, with 34% of business taking place online. 

Will shareholders benefit from a changed retail environment?

In a tough retail environment, Nordstrom has built an impressive interconnected business model catering to almost every potential customer. But the question is, has the stock market already priced in high expectations?

A key metric for stock price valuation is the P/E, or price-to-earnings ratio, which shows how much investors are willing to pay for each dollar of earnings in a given stock. Currently, Nordstrom has a P/E of 11.8, which compares favorably with the industry average of 25.19, and the S&P 500 average of 31.55. These comparisons indicate Nordstrom is relatively undervalued, compared to its peers. 

The price-to-sales ratio, or P/S, compares a stock's price to its total sales and is another metric to consider when evaluating a stock price. Generally, a lower reading is considered better. Nordstrom's P/S ratio is currently 0.40, well below the 2.32 P/S ratio that is average for the S&P 500. 

Fourth-quarter and full-year 2019 results are planned for release on March 3 and will be very interesting since the holiday sales quarter is crucial for most retailers. Should you buy?

Nordstrom is not only surviving the changing retail environment, but it is also thriving. The combination of internet options and the Nordstrom Local concept brings the store into more customers' neighborhoods. This approach emphasizes convenience and service for the shopper, a formula that builds customer loyalty like no other.

The retail environment is being reshaped by the day. Nordstrom's famed customer-centric philosophy is what has led it to survive for 119 years, and is making it a present-day winner. I think Nordstrom is a buy for long-term investors.

Anne Burdakin has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

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Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
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