This Struggling Retailer Can't Seem To Get It Right...

Nathan Slaughter's picture

Thursday, June 6, 2019 - 2:30pm

by Nathan Slaughter

The first quarter proved to be challenging for many retailers (especially in the apparel sector), and it was no exception for Nordstrom (NYSE: JWN), a holding in my Daily Paycheck premium newsletter portfolio.

Sales for the period slipped 3.3% to $3.44 billion, driven largely by weakness in the full-price division (the off-price Nordstrom Rack stores performed in line with last year). It wasn't an egregious top-line miss, but with operating margins contracting, earnings were cut in half to just $0.23 per share -- well short of expectations.

With the slow start, Nordstrom trimmed back its full-year 2019 outlook and is now forecasting earnings between $3.25 and $3.65 per share, versus a prior range of $3.65 to $3.90 per share. In other words, the previous worst-case scenario ($3.65) is now the best case.

While the industry, in general, is fighting against headwinds, Nordstrom has hobbled its own turnaround efforts with operational miscues. Changes to the firm's well-regarded loyalty club program didn't go over well (failure to send out promotional sale flyers was cited as a contributing factor). Merchandising strategies were also off the mark.

The Bright Side
Nordstrom logoFashion is fickle, and it's never easy to predict what customers will want from one quarter to the next. But Nordstrom has been getting stuck with unsold inventory that winds up on the clearance rack. On the positive side, these aren't fatal wounds. Management is already working to "better align" merchandise assortments with customer preferences. The company, which is famous for its customer service, is also launching a new-and-improved loyalty program. And online sales remain a bright spot, growing 7% last quarter -- which explains ramped-up spending on digital marketing.

It's also possible that the worst might be behind us... The opening of a brand-new flagship store in New York later this year might generate some investor enthusiasm, and the last time JWN shares were oversold and sank into the $30s, they bounced more than 50% over the next few months.

JWN chart

Action to Take
That being said, the company isn't executing very well, and I've lost confidence in management's ability to stay on top of changing trends. Raising guidance one month and lowering it the next shows an inability to accurately read the marketplace.

It wasn't that long ago that the board balked at an offer to take the company private at $50 per share. That bid is looking better and better in hindsight.

This has been a rare miss for us so far in the Daily Paycheck portfolio, but I'm going to give management a bit more time to right the ship. In the meantime, I have a rating of "Hold" on this stock, and I'm putting in a protective stop-loss order at $30 to limit any further damage to our otherwise stellar portfolio. For those of you who don't already own this one, it might be advisable to say away until the picture becomes clearer.

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Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.