It's not often that my father is enthusiastic during a shopping trip to a department store. So when he recently raved about happily shopping for shoes while sipping apple martinis, it struck my attention.

In an intense retail marketplace, these are the stories that are the key to determining a store that differentiates itself from competitors to continuously attract new customers and retain the old. His experience at Nordstrom (NYSE: JWN), coupled with its nomination for best customer service firm last year, encouraged me to dig in and check out the financials.

The retail shellacking
In the midst of recessionary fears with the housing and credit markets in turmoil, consumers are closing their wallets on retailers. Accordingly, stock returns over the past year for some of the nation's most popular shopping destinations have plummeted. 


Approximate 12-Month Return

Sears Holdings (Nasdaq: SHLD)


Macy's (NYSE: M)




Kohl's (NYSE: KSS)


Saks (NYSE: SKS)


Target (NYSE: TGT)


Like a gigantic blowout sales rack in your favorite store, the industry might look like a pile of unwanted stocks selling at bargain bin discounts. But digging through the mess, you can typically find quality on the cheap.

Browsing through the stock sale shelves
While I wouldn't count out the others on the list above as potential investments, I can't stop thinking about my dad's successful and enjoyable shopping experience at Nordstrom.

The department store has long been known for its exceptional customer service and shopping experience. Its personal shopping service has no minimum purchase requirement, shoppers have access to a concierge service, and customer appreciation events are held, wining and dining shoppers (the source of my father's martini). These are advantages that are difficult to replicate.  In fact, Nordstrom is so legendary with its customer service that a book has been written about it.

But beyond its legendary customer service, the Seattle-based retailer has more than just green alcoholic beverages going for it.

Out of the stores, into the financials
To begin with, the Nordstrom family continues to be heavily involved in the company, both as managers and as shareholders. In fact, insider ownership accounts for a whopping 22% of outstanding shares. Makes me feel safer knowing investors' money is next to theirs.

Then there's the fact that management has been aggressively buying back shares, an action that should lead to greater shareholder value, for what we think are undervalued shares. In the freshly released fourth-quarter earnings report, management noted that it repurchased 11 million shares totaling $388 million, and still has $1.4 billion remaining on the current buyback authorization plan.

Of course, the company wouldn't be buying back shares unless management thought the shares were undervalued. Nordstrom is currently trading at roughly 13.3 times forward earnings and less than 7 times EV/EBITDA, notably lower than in its recent past. Add to that the fact that relative to many of its competitors, it still has a lot of room to grow, and the long-term prospects start looking pretty good. With just 157 stores nationwide, analysts have pegged the company to grow at nearly 12% in the next five years.

Don't be a Negative Nancy: Check the earnings call
What about a recession, you say? There's no doubt that sales are softer than they have been and that they will continue to be throughout 2008. Earlier this week, the company reported fourth-quarter net earnings of $0.92 per diluted share, a 3.4% increase from last year's $0.89 in the fourth quarter. Are these catastrophic numbers?  

Personally, I don't think so, and the market doesn't appear to be too upset, either. Despite the sluggish sales, management effectively managed inventory, reducing it by 4.1%, all without taking a hit to gross margins.

What's more, Nordstrom's focus on affordable luxury, which caters to demographics with more stable and greater income, will help it weather the storm. Plus, even if we do submerge into a recession, the down period won't last forever. As a value investor, I look for long-term bets that have been beaten down for the wrong reason.

Might Nordstrom's prices fall even further? Yes. But you can't pretend to know what's going to happen in the macro environment in the next 12 months. Instead, focus on finding a solid business that's positioned to continue to succeed once hard times pass, selling at a reasonable price. So does Nordstrom fit into this category? I say, pass the martini.

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