Nordstrom Stays Neutral - Analyst Blog

Based on the company’s robust fourth-quarter 2011 results, we reiterate our long-term ‘Neutral’ recommendation on Nordstrom Inc. (JWN), one of the leading fashion specialty retailers in the U.S., with a target price of $57 per share.

Nordstrom’s fourth-quarter 2011 earnings of $1.11 per share beat the Zacks Consensus Estimate of $1.10 and surged 6.7% from the prior period. The increase was primarily driven by growth of 12% in its top line, stemming from increased comparable store sales and improved gross margin.

Bolstered by better-than-expected quarterly results, the company expects earnings in the range of $3.30 to $3.45 per share for fiscal 2012, an increase of 5% - 10% from fiscal 2011. The earnings guidance is based on same-store sales growth of 4% - 6%. Further, management is planning to make capital investments in the range of $480 million to $520 million, primarily for boosting e-commerce capabilities.

Nordstrom remains focused on expanding its store network to drive top-line growth. During fiscal 2011, the company added 18 new stores, which contributed significantly to year-over-year growth of 12.7% in fiscal 2011 net sales.

Keeping track with its store expansion strategy, the company recently announced the opening of two new Nordstrom Rack stores; one in Huntington, New York, and the other in Upland, California. The company’s focus on store expansion was also evident from the opening of two new Nordstrom Rack stores in the month of March 2012 – one in Orange, California and the other in Salt Lake City, Utah.

Moreover, Nordstrom plans to take its store expansion strategy a step ahead in fiscal 2012, targeting to open 16 new stores consisting of 1 full-line store and 15 Rack stores.

Nordstrom’s strong line up of globally recognized brands acts as a competitive advantage for Nordstrom while bolstering its well-established position in the market. The company offers a broad array of over 500 brands, targeted toward the whole family, through a strong nationwide network of 226 stores situated across 30 states.

However, consumer's confidence and spending behavior may dampen due to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels, which may negatively affect their disposable income, and in turn, the company's growth and profitability.

Above all, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players, such as Gap Inc. (GPS), Limited Brands Inc. (LTD) and Abercrombie & Fitch Co. (ANF). The company primarily competes on the basis of fashion, quality and service. To retain the existing market share, the company may resort to aggressive pricing, which could affect its margins.

Nordstrom's shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating.

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