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Investors Don't Trust Nordstrom's Big Turnaround Plan

By Adam Levine-Weinberg - Feb 6, 2021 at 12:05PM

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Nordstrom laid out a plan to boost earnings per share to record levels within a few years, but it will need to demonstrate real progress to convince investors.

At an investor event on Thursday, Nordstrom (JWN 5.42%) revealed a plan to fully reverse its 2020 sales decline and emerge from the COVID-19 pandemic bigger and more profitable than ever. Clearly, investors weren't convinced.

While Nordstrom's targets imply a rapid earnings recovery over the next two to three years and steady growth thereafter, Nordstrom stock plunged 7% on the day it revealed its turnaround plan. Let's take a look at Nordstrom's updated strategy and whether the recent pullback in the stock has created a buying opportunity.

JWN Chart

Nordstrom stock performance, data by YCharts.

Optimizing the full-price business

Nordstrom is implementing several strategies to get full-price sales growing again. First, it will expand its "market" strategy to its top 20 markets -- representing 75% of its sales -- up from 10 today and just five as of last summer.

This strategy entails setting up an in-market logistics network that allows its stores and e-commerce business to share inventory within a metro area. That enables Nordstrom to offer next-day pickup at any store for a wide variety of items, along with faster shipping to customers' homes. In its initial markets, this strategy boosted sales growth by nearly 2 percentage points, compared to Nordstrom's business in other cities.

The upscale retailer also plans to expand its merchandise selection from around 300,000 items today to around 1.5 million items. Most of this growth will come from utilizing partnership models (where brands control their own inventory and lease space within Nordstrom stores or ship items directly to customers' homes) more broadly than it does today. The increased merchandise selection should boost sales with little risk, since Nordstrom generally won't own the incremental inventory.

Finally, while Nordstrom has been an e-commerce leader for years, it plans to up its game by combining predictive analytics and one-on-one interactions with stylists to offer more personalized product suggestions, driving sales. This should boost digital sales to 50% of Nordstrom's total revenue going forward, up from 33% in fiscal 2019.

Shifting gears at Nordstrom Rack

The Nordstrom Rack off-price business represents the iconic retailer's biggest growth opportunity. Nordstrom's off-price sales surged 49% between fiscal 2013 and fiscal 2016. However, the business lost momentum in recent years; sales increased just 15% between fiscal 2016 and fiscal 2019. In addition to its ongoing efforts to drive digital sales growth, management plans to lean on two new strategies to turn things around.

The entrance to a Nordstrom Rack store, with the Nordstrom Seattle flagship store in the background

Image source: Nordstrom.

First, Nordstrom Rack is adding lower-price merchandise to its assortment in order to broaden its appeal. Going forward, it will segment its physical stores into three groups based on local market demographics and shopper habits. One group will maintain a more traditional merchandise mix, one will lean toward lower-price items, and one will have a hybrid assortment with a wider range of price points.

Second, Nordstrom Rack will expand its merchandise assortment in underpenetrated categories with strong demand. Today, it gets 20% of its sales from home, beauty, kids, and activewear. Best-in-class off-price retailers get 25% of their sales from the home category alone.

Nordstrom Rack aims to more than double sales across those four categories over the next few years. All told, management thinks Nordstrom Rack's annual revenue could grow by $2 billion over the long term from the $5.2 billion it generated in fiscal 2019.

A view into Nordstrom's future

In conjunction with the investor event, Nordstrom confirmed its guidance for the recently ended fourth quarter. That's not surprising, as it had reported its holiday sales results just three weeks earlier.

For fiscal 2021, Nordstrom expects sales to rebound by at least 25% after falling more than 30% last year. It also expects to return to profitability. This outlook may have disappointed investors: The analyst consensus had called for 27% sales growth and a profit of $1.47 per share (roughly $300 million on a pre-tax basis).

Looking further ahead, Nordstrom expects revenue to surpass the $15.5 billion generated in fiscal 2019 within a few years and grow at a low-single-digit rate thereafter. It's planning for an operating margin of more than 6%. These targets would imply earnings per share of roughly $4 to $5 -- and possibly higher, if Nordstrom resumes its share buyback program.

Don't worry too much about near-term forecasts

Nordstrom's 2021 outlook isn't very inspiring. However, given that the pandemic hasn't ended yet and sales fell more than 20% in the fourth quarter, it would have been rash to project a rapid recovery. The external environment won't fully normalize until at least 2022. Nordstrom's results in fiscal 2022 will be a better test of its turnaround progress.

If Nordstrom can hit its long-term targets, the stock will prove to be a great bargain at its current level. Success certainly isn't guaranteed. But the company has financial strength, a strong brand, and digital prowess; several competitors have been liquidated; and off-price retail has grown rapidly. Thanks to those factors, the company has a good shot at rebuilding its sales and margins over the next few years.

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