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Here’s Why Nordstrom Stock (NYSE:JWN) Might be in Trouble
Stock Analysis & Ideas

Here’s Why Nordstrom Stock (NYSE:JWN) Might be in Trouble

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Like many other high-end retailers, Nordstrom’s business has been hit hard by inflation, and investors are understandably jittery. Even as Nordstrom posts results that exceed Wall Street’s expectations, the company’s forward guidance suggests that moving merchandise won’t be an easy task.

Nordstrom’s (NYSE:JWN) attempts to appease inflation-beset customers with clearance sales and product markdowns haven’t succeeded – and the data, unfortunately, tells a tragic tale for Nordstrom. As we’ll discover, even Nordstrom’s Rack division, which features deep discounts on a variety of premium items, won’t save the company from its financial woes. As a result, I am neutral on Nordstrom stock.

Nordstrom is a retail chain that offers apparel, shoes, beauty items, various accessories, and home goods. Its stores have somewhat of a luxury feel to them, which isn’t necessarily helpful during a time when many Americans are struggling with high inflation.

It’s undoubtedly frustrating for Nordstrom’s investors as the company managed to beat revenue estimates while adjusted EPS was in line with expectations. Yet, as the retailer lowers its full-year earnings outlook, it’s probably not a good time to “shop ’til you drop” with Nordstrom stock.

Don’t be Hasty to Buy the Dip in Nordstrom Stock

I love a bargain as much as anybody. Yet, there’s a time to jump into a dip-buying trade and a time to stay cautious. When it comes to Nordstrom stock, it’s fine to put it on your value-investing watch list, but take note of the company’s major challenges before taking a long position in the shares.

It’s not hard to see why value hunters may be tempted to load up on Nordstrom stock now. For one thing, the shares are fairly close to their 52-week low of $16.83. If they return to the 52-week high of $36.43, then some well-timed Nordstrom investors might double their money.

Also, Nordstrom has a trailing 12-month P/E ratio of 6.96, indicating a strong value. Furthermore, the company pays a generous forward annual dividend yield of 4.35%. Are you ready to hit that “buy” button yet?

Hold on, though. There’s much more to consider here than dividends and P/E ratios. Sometimes, stocks decline sharply because a company is struggling. In Nordstrom’s case, the retail store chain typically appeals to upper-middle-class customers with extra discretionary income to spend. However, high inflation can dissuade these customers from buying non-essential products.

KeyBanc Capital Markets analyst Noah Zatzkin was probably thinking about high inflation when he warned, “While we continue to think the higher income profile of Nordstrom’s average customer positions the company well in the current environment, clearly Nordstrom is not immune to the difficult macro backdrop.”

Thus, even if Nordstrom’s customers are generally in the upper range of the middle-class income spectrum, high inflation is bound to have an impact on their shopping habits and, therefore, on Nordstrom’s top and bottom lines.

Nordstrom Delivered Good Q2 Results, but Don’t Jump to Conclusions

After Nordstrom posted its second-quarter 2022 financial results, bullish-leaning investors had an opportunity to say that the company beat analysts’ revenue forecasts. That’s fine, but there’s more to the story. Jumping to hasty conclusions after quickly skimming over the headlines could lead to unfortunate investing decisions, especially when it comes to Nordstrom stock.

The company’s top-line beat wasn’t huge. Nordstrom’s Q2 2022 revenue of $4.09 billion slightly exceeded analysts’ expectations of $3.96 billion. Moreover, Nordstrom’s adjusted earnings of $0.81 per share were in line with the analyst consensus estimate.

CEO Erik Nordstrom acknowledged that Nordstrom’s second quarter was less than ideal. “While our quarterly results were consistent with our previous outlook, customer traffic and demand decelerated significantly beginning in late June, predominantly at Nordstrom Rack,” the CEO acknowledged.

Nordstrom Seems to Have Difficulty Clearing Out Its Inventory

It’s interesting to consider that there are global supply chain disruptions, and many businesses can’t get the products and components they need. In contrast, Nordstrom might actually have excess inventory. This is what can happen when a company over-orders products in anticipation of a certain level of sales, but high inflation prevents some sales from taking place.

We can see this phenomenon showing up in the numbers. Specifically, Nordstrom’s second-quarter 2022 ending inventory increased 9.9% versus the same period in Fiscal Year 2021. President and Chief Brand Officer Pete Nordstrom directly acknowledged this issue, assuring investors that Nordstrom is “aggressively right-sizing” its inventory while “investing in supply chain and merchandising capabilities that will benefit us in 2023 and beyond.”

Inventory issues must be weighing on the executives’ minds lately, as Nordstrom’s CEO also addressed this problem. “We are adjusting our plans and taking action to navigate this dynamic in the short term, including aligning inventory and expenses to recent trends,” he emphasized.

Yet, Nordstrom’s forward guidance suggests that moving merchandise to clear inventory levels won’t be easy. It’s worrisome that Nordstrom reduced its Fiscal Year 2022 revenue growth forecast from a range between 6% to 8% to a range between 5% and 7%. In addition, Nordstrom slashed its full-year earnings per share (EPS) outlook from a range of $3.20 to $3.50, to a range of $2.30 to $2.60.

Is JWN Stock a Buy, Hold, or Sell?

Turning to Wall Street, JWN has a Hold consensus rating based on two Buys, eight Holds, and five Sells assigned in the past three months. The average Nordstrom price target is $20.31, implying 14.9% upside potential.

Conclusion: Should You Consider Nordstrom Stock?

If you’re about to buy Nordstrom stock based on the company’s P/E ratio, its recent quarter, and/or dividend payments, be careful. Think about the company’s ongoing challenges as consumers – even high-end shoppers – might reduce their discretionary spending due to elevated inflation. Besides, management is effectively admitting that it’s having a tough time clearing out its backlog of inventory. Thus, it’s sensible to take a neutral stance on Nordstrom stock and refrain from shopping for shares now.

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