Nordstrom's (JWN 0.68%) recovery from the devastation caused by the coronavirus pandemic continues. The retailer recently reported earnings for the quarter that ended May 1, showing revenue increased by 44%. The company benefited as more than $300 billion in stimulus checks hit bank accounts in March and April. Furthermore, nearly 50% of Americans have received at least one dose of a vaccine, and that's bringing down the spread of COVID in the U.S. With a reduced risk of infection, a growing number of people are feeling comfortable visiting stores in person.
Still, investors were unimpressed, sending Nordstrom stock down nearly 10% following the report. So let's dive into the details of the earnings report and take a look at the company's long-term prospects to determine if you should buy Nordstrom stock right now.
Image source: Getty Images.
Pandemic recovery
In the first quarter of the company's new fiscal year, net sales increased by 44% from the same quarter the year before. But more interestingly, net sales were only down 13%. Nordstrom has recovered to almost the level of sales before the pandemic caused sales to crater. Stimulus checks helped fuel spending, to be sure. But consumers were also looking to update their wardrobe in anticipation of going out and seeing people more often.
The boost in spending was not enough to bring Nordstrom back into profitability. The company reported a net loss of $166 million in the quarter. Still, it was a major improvement from the loss of $521 million in the same quarter a year ago. That's in stark contrast to its rival Macy's, which reported better-than-expected profits and raised expectations for the rest of fiscal 2021.
The two tend to perform similarly in terms of operating profit margin (see chart), although it appears Macy's has adjusted better than Nordstrom during the pandemic.
Data source: YCharts
Long-term prospects
Looking ahead, Nordstrom aims to generate low-single-digit revenue growth and $1 billion annually in cash flow. It's certainly not going to be a fast-growing company, but it doesn't have to be to provide solid returns to investors.
That path could be less risky because it has two store formats -- full-price and off-price -- and its off-price locations outnumber full-price ones by more than two to one (249 to 107). Over the last several years, consumers have become more value-oriented. Thus, off-price stores have outperformed their full-price counterparts -- a trend likely to continue. However, if consumers shift their preferences and desire a higher-end shopping experience, Nordstrom has them covered as well.
Moreover, Nordstrom has accomplished the shift to digital shopping and has made significant investments to meet its customers online. In the most recent quarter, digital sales were 46% of overall sales. So it's no longer the case that Nordstrom loses customers who want to shop online.
Should you buy Nordstrom stock
Nordstrom's near-term prospects look good. Consumers with enough cash saved up can more easily afford to purchase personal items like new clothes. This trend gives Nordstrom the chance to attract customers to a store. Furthermore, as people start returning to offices and schools, they will need to update their wardrobe.
Nordstrom closed Tuesday with a forward price-to-earnings ratio around 30, close to the lowest price it has traded for year-to-date. In addition, with the worst of the pandemic apparently behind it, the company is rapidly recovering to pre-pandemic levels.
Despite the solid near-term prospects, 30 times forward earnings is too much to pay for Nordstrom stock. Investors looking for a stock that can benefit as economies reopen can find better choices elsewhere.
