Nordstrom: High-Class Profits
If you want a pair of Amalfi slingbacks, you can buy them at several boutiques and at a couple of department stores. But if want to buy them in a space surrounded by a wonderland of other high-fashion merchandise for the entire family and you want top-notch service to boot, you go to Nordstrom.
The Seattle-based retailer is so firmly entrenched as the go-to clothier for the well-to-do that even Wall Street has a hard time realizing how good it is. On May 18, Nordstrom (symbol JWN) posted earnings for the quarter that ended May 5 of 60 cents a share, or three cents a share more than analysts expected.
By coincidence, two other department-store chains reported earnings the same day, and news reports lumped them together. Kohl's (KSS) and J.C. Penney (JCP) also had strong quarters, and both said that brands only available at their stores bolstered results. That may be true, but grouping Nordstrom with middle-brow retailers ignores the fundamental difference between them and Nordstrom.
Nordstrom's exclusivity is on a different order. It has many brands that wouldn't be caught dead in a Kohl's or Penney's or Target. And its own private-label merchandise carry profit margins that dwarf those of the higher-end Polo Ralph Lauren merchandise sold at Kohl's and Penney's. Even among luxury retailers, Nordstrom ranks highest for "customer experience," according to the Luxury Institute, which surveys the wealthiest Americans. And the well-heeled care less about gas prices and other economic jitters. That distances Nordstrom from factors that affect other retailers more quickly.
The company's revenue growth comes mainly from improving sales at existing stores, not from opening new ones. It has 98 full-line Nordstrom stores, 50 Nordstrom Rack outlets stores and 40 Faconnable boutiques, 36 of them in Europe. Although it just opens just three or four new stores every year, sales are expected to rise 8% from 2007 to 2008.
Despite Nordstrom's strong position, its price-earnings ratio is in line with its industry. Nordstrom shares, which closed at $52.05 on May 22, sell at 19 times the average of analysts' earnings estimates of $2.89 a share for the fiscal year that ends next January, according to Thomson Financial. Analysts see $3.30 a share the following year.
But Zacks Equity Research analyst Robert Plaza thinks the estimates are too low. He has Nordstrom earning $3.38 in the fiscal year that ends in January 2009. He says that while Nordstrom increased its earnings guidance for the current fiscal year, "the company should easily beat those numbers." He rates the stock a buy.