The retail sector has been hit hard by the coronavirus pandemic, and Nordstrom (JWN +0.00%) has been no exception.
Shares of the high-end department store are down nearly two-thirds this year as the company has been forced to shutter stores and sales have collapsed, just as they have at many of its nonessential retail peers. However, with the stock now trading at about $14 -- near a historic low -- investors may be wondering if it's worth putting some money into this well-run retail chain. Let's take a closer look at what Nordstrom has to offer to see if the stock is worth buying today.
Image source: Nordstrom.
Nordstrom during the pandemic
Like much of the sector, Nordstrom spent the spring in a downward spiral. The company said it would temporarily close its locations on March 17. It also slashed capital expenditures and suspended share buybacks. The following week, it drew down a revolving credit facility by $800 million and cut $500 million in operating expenses and capital expenditures. That was on top of a previously planned reduction of $200 million to $250 million. It also suspended its dividend and furloughed employees starting April 5.
Later in April, Nordstrom raised $600 million in additional debt at an 8.75% interest rate. The following month, it announced it would permanently close 16 full-line stores and its three Jeffrey boutiques to focus on its digital channel, which had been generating a third of its sales before the pandemic.
Sales plunged 40% in the first quarter, and the company reported a loss of $521 million, or $3.33 per share. The company began reopening in early May; as of May 28, it had reopened 40% of its store base. Digital sales increased 5% in the first quarter and made up more than half of total revenue. At the time, management anticipated a slow recovery and said it would break even on a cash burn basis by the end of the second quarter.
The company also faced a setback during the George Floyd protests, which led to some temporary store closures. Management has not given any more updates since the late May earnings call, though it has told landlords it would pay only half its rent for the rest of the year, which suggests that it anticipates continued challenges. Considering the recent resurgence of coronavirus cases, the prospects for recovery have probably only gotten worse.
The fundamentals
Nordstrom is in a better position than many other department stores. J.C. Penney and Neiman Marcus have already filed for Chapter 11 bankruptcy, overwhelmed by billions in debt. Nordstrom's strong digital sales and off-price Nordstrom Rack stores make it more diversified than competitors like Macy's and Kohl's, which have been deeply impacted by the pandemic. Nordstrom offered a solid dividend before the pandemic, but that's unlikely to return until the crisis is over. The company finished the first quarter with $1.4 billion in cash and $3.3 billion in debt, and it should have enough liquidity to get through the rest of the year.
The company opened a new flagship store in Midtown Manhattan last October as part of a deeper push into the New York market, but the timing of that opening, which cost hundreds of millions of dollars, now seems inauspicious.
Prior to the pandemic, Nordstrom was already seeing sales growth slow in areas like its Rack division and digital sales, showing perhaps a need for a new direction. Management had hoped to drive long-term growth by focusing on its local market strategy. The plan involves combining digital and physical assets in markets like New York and Los Angeles and opening Nordstrom Local stores -- small-footprint service hubs that offer order pickup and return services, alterations, and styling consultations. The company plans to expand the strategy to San Francisco, Chicago, and Dallas.
Is it a buy?
Nordstrom has a number of enviable qualities in a retailer: a strong brand with a reputation for quality products and good customer service, a diversified reach through full-line department stores, the off-price Rack business, a healthy online business, and a balance sheet that can weather the coronavirus crisis.
However, the future of the retail industry -- especially in malls, which house about 40% of Nordstrom's business -- looks much more troubled than in the past. Even Nordstrom's market strategy, which seemed like a smart way to leverage its assets, may not be enough to return the company to stable profitability and growth.
At this point, Nordstrom seems too risky to be a buy, and investors deserve at least some favorable signals from the company before they add the stock to their portfolios. One of those positive signs could be the retailer's annual Anniversary Sale, set to launch this year on Aug. 19. The popular event, which normally drives hundreds of millions of dollars in sales, could be a catalyst for a recovery. Investors should keep an eye on the sale and the company's next earnings report, due around the same time, as success with both could spark a rebound in the stock.
