Nordstrom: Ringing in the Holidays


Nordstrom: Ringing in the Holidays

Fewer markdowns, more-efficient inventory controls and a turnaround in ladies' apparel have this department store's stock looking rather stylish going into the all-important shopping season.

Shoppers looking for bargains at Nordstrom are being disappointed more and more often -- and that couldn't make Nordstrom shareholders happier.

The company that began as a single shoe store in Seattle in 1901 now has more than 180 stores in 27 states and has a stock market value in excess of $12 billion. The company's market value got a boost on November 20, when the shares (symbol JWN) jumped 4.5%, to $49.62, on an earnings report that exceeded investor expectations in several departments.

Earnings per share increased 33%, to 52 cents a share, about a penny more than Wall Street analysts had expected. Fall fashions flew off the racks, pushing total sales up 12%, to $1.87 billion. Same-store sales -- sales at locations open at least a year -- climbed an impressive 11%. Catalog sales gained the most, up 30%, followed by sales at Nordstrom Rack, the company's discount stores, up 11%, and full-line department store sales, up nearly 9%.

Nordstrom isn't just selling more clothes, shoes and outerwear. It's squeezing more profit -- way more than analysts had thought -- out of each trip to the cash register. Gross profit margins improved by an astounding degree, expanding from 36.5% of sales in the third quarter of '05 to 38% in this year's third quarter. And that's where the interests of shoppers and investors diverge -- those healthier margins stem mainly from fewer merchandise markdowns.


A turnaround in ladies apparel, long a lagging business for Nordstrom, appears to be underway, responding to new leadership in that department. And new technology is giving the retailer a solid command of inventory. Nordstrom can track items in real time as they move through the supply chain. If a given style, color, size (or in the case of footwear, width) isn't selling, it's marked down fast to get it off the selling floor. Meanwhile, popular styles are quickly replenished.

The company's mastery of a new software package should improve inventory efficiency in the all-important holiday shopping season and into next year. Nordstrom "looks good with regard to having the right software in place and knowing how to use it proficiently," analyst Robert Buchanan at A.G. Edwards Sons told clients after the company released earnings.

Analysts quickly revised their earnings forecasts, and many raised their price targets for the stock. Buchanan, who rates the stock a buy, raised his estimates for the fiscal year ending January 2008 calendar year to $2.94 a share, from $2.89, and said Nordstrom shares could trade as high as $57 within eighteen months, up from an earlier target price of $54. The stock trades at 17 times his earnings estimate. Buchanan sees long-term earnings growth on the order of 16% a year on average -- more than twice what Edwards expects from corporate America, and better than the estimated 13% average annual growth rate of competitors such as Dillard's, Federated Department Stores, J.C. Penney and Kohl's.

Analysts at UBS Securities, Stifel Nicolaus and Buckinghan Research Group are also all bullish on the stock, with price targets ranging from $54 to $58 a share. Others who follow the stock aren't quite as gushing: An analyst at Credit Suisse says "the business is well-positioned for the long-term" but still rates the stock neutral, with a price target of only $42 a share. Lehman Brothers raised its price target to $50 from $48, but also remains neutral.

It's the same with fashion -- you just can't please everyone -- even with this holiday season's must-have stock.