Put together Nordstrom's (JWN +0.00%) better-than-expected third-quarter earnings report with the positive developments on the COVID-19 vaccine front, and it's understandable why investors have taken a shine to the department store chain.
Nordstrom may have found its footing again at just the right time for retail to bounce back. Yet just because the market is hopeful doesn't automatically mean you should be, too. Let's look at whether Nordstrom's stock is a buy.
Image source: Nordstrom.
Call it Nord-strong
The upscale retailer posted a surprise profit in the third quarter, lower than what it did a year ago, but catching Wall Street unaware. Analysts had expected a loss of $0.13 per share for the period, but Nordstrom came in with a $0.34-per-share profit. Even removing the benefit of $0.12 per share included from the CARES Act -- the economic stimulus enacted due to the pandemic -- it was still a good performance.
Nordstrom was able to bounce back seemingly better than many other retailers due to having a strong online presence, even before the COVID-19 pandemic. In the quarter, digital sales of $1.6 billion were up 37% year over year and represented 54% of total sales, showing the retailer was able to seamlessly transition to how most consumers are shopping these days.
It also more fully leveraged its physical stores with its digital push, the result being 10% of all online purchases were picked up at its Nordstrom Rack discount stores and 25% were picked up at its full-price stores.
Finding what works
The full-price store has been a potential drag for the retailer because that is increasingly out of sync with today's consumer.
Catering to an upscale clientele with mostly high-end apparel and little in the way of home goods (a popular category that continues to grow), Nordstrom's full-price stores were suffering from declining same-store sales even before the pandemic. Fortunately, the chain had noticed that, and was leaning heavily into the Rack concept, which now represents the biggest source for new Nordstrom customers.
It is also fortunate in that its stores tend to be located in upper-tier Class A malls, the one segment of the industry that is expected to survive the pandemic and the retail apocalypse that was gripping retailers beforehand.
Mall operators are feeling the pinch of the health crisis every bit as much as their tenants and both CBL and Associates Properties and Pennsylvania REIT recently declared bankruptcy. But top-tier malls like Simon Property Group (SPG +0.80%) are in a much better financial position. Nordstrom and its Rack stores have a presence in over 25% of Simon's malls, though the retailer had announced plans to close some of them.
It's going to get better
Arguably what has investors (and consumers) the most excited is the potential for a COVID-19 vaccine to get the country closer to normalcy. Several pharmaceuticals and biotechs have reported positive developments in their vaccine trials, with 90% or more effectiveness, which caused a lot of people to see hope in getting to a better place soon.
Nordstrom's stock, which had fallen below $12 a share, mounted a sharp rebound on the vaccine news and has doubled in value in just the last month.
No doubt a good portion of those gains came as short-sellers raced to cover their positions. With more than 40% of the retailer's shares outstanding sold short, a squeeze play helped lift the stock, but it's clear Nordstrom itself has given the market reason to feel good, too.
Because the department store also began generating free cash flow once again this past quarter and is trading at just a fraction of its sales, Nordstrom's stock looks like it's a buy. While the easy money has already been made, there's good reason to believe the retailer has more upside potential rather than downside risk in front of it.
