The Investment Outlook
Nordstrom (NYSE:JWN) has recently undergone significant changes in its business model, setting the stage for a potential turnaround. These changes have paved the way for Nordstrom to achieve profitability and have beaten analysts’ expectations in the past two quarters. Key structural improvements include enhanced rack performance, improved inventory productivity, and optimized supply chain capabilities.
Despite recent lows in its stock price, primarily driven by concerns over the recession and Nordstrom’s position in the discretionary spending sector, we believe the current dip presents an excellent opportunity for patient investors.
Operational Challenges Faced by Nordstrom
The COVID-19 pandemic presented inventory challenges for Nordstrom in 2020, leading to store closures and actions such as order cancellations and inventory reduction efforts. As restrictions eased in 2021, supply chain issues hindered restocking efforts. Coupled with a deceleration in demand, Nordstrom found itself with excess inventory to clear in 2022. In 2023, interest rate increases resulted in decreased consumer spending, impacting Nordstrom and other retailers.
While these challenges may suggest that Nordstrom’s business model is not entirely adaptable to changing environments, it is important to acknowledge the significant changes Nordstrom has made since the pandemic to prioritize profitable growth.
A Promising Business Turnaround
Nordstrom has undertaken various growth initiatives in the past decade, but many of these failed to yield significant returns. However, the pandemic prompted a shift in focus towards profitable growth and the core strength of offering sought-after premium items. Nordstrom exited the Canadian market and discontinued the Trunk Club business, redirecting efforts towards sourcing premium brands for its rack stores. The recent earnings reports indicate that Nordstrom’s business operations are on a path to recovery.
The latest Q2 earnings report showcased Nordstrom’s ability to enhance profitability even with declining sales. The rack business has shown improvement, and the strategic transformation of incorporating more premium brands into their rack stores has contributed to Nordstrom’s recovery.
Entering the second half of 2023 with a healthy inventory, Nordstrom is well-positioned to capitalize on the opportunity for expanding gross margins. Our analysis suggests that Nordstrom holds a potential upside ranging from 2X to 3X its current market value.
Risks and Conclusion
Operating in a fiercely competitive retail landscape requires strong management execution. Nordstrom’s inventory management discipline and ability to adapt to changing consumer demand will be crucial.
High Interest Rate Environment
The high interest rate environment poses a challenge to Nordstrom’s turnaround strategy. The management’s focus on inventory execution and mitigation of delinquency rate impacts will be essential to navigate this obstacle.
Despite these risks, Nordstrom’s potential for recovery and its current dividend yield make it an attractive investment for patient shareholders.