Nordstrom's Big Run Set to Stall

 | Nov 14, 2011 | 10:32 AM EST
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With the kickoff to the holidays just 11 days away, I decided to take a look at Nordstrom (JWN). Since the economic debacle of 2009, Nordstrom is up nearly 533%. The stock bottomed out just over $7 a share.

While it would seem that Nordstrom is an ideal way to play the recovering economy, management recently trimmed guidance, which caused the stock to fall off its lofty 52-week high perch. After that huge 500% run can the stock go any higher? Isn't the most optimistic scenario already baked in to the stock?

Last week Nordstrom posted third-quarter earnings per share of $0.59. Same-store sales increased 7.9% and total sales rose 14%. Despite the strong results, management cut its fiscal 2012 guidance. Instead of averaging a 7% increase in same-store sales, management cuts its estimate to 6% based on economic turmoil abroad. The company told analysts to expect EPS in the $3.05 to $3.10 range, not the previous consensus of $3.14. 

Management lowered guidance because same-store sales comparisons with last year are tougher and expenses have risen. But the analyst community continues to believe that consumers, especially Nordstrom's core affluent customer base, will continue to spend despite worries over the European economy.

The company has certainly been on a roll. Back in August, Nordstrom reported that sales rose 12% on a 7.3% comp and in July comps rose 12%. May produced  another double-digit comp. But same-store sales were boosted by the company's half-yearly sales. In May the company held a half-yearly sale for women and kids. Half-yearly sales for Men are held in June and December. And the anniversary sale begins in July. So, it wasn't like same-store sales were driven by full-price sales. In fact, between fiscal 2003 and 2008, same-store sales averaged 5.5%. When the downturn hit, Nordstrom same-store sales fell 9% in fiscal 2009 and were down another 4.2% in fiscal 2010. Operating margin fell more than 500 basis points to just 5.6%. But sales began to recover as the economy came back from the brink. Total same-store sales jumped 8% in fiscal 2011 and, as we've seen, continued to improve in fiscal 2012.

It seems to me that Nordstrom is returning to a more normal revenue pattern and the analyst community is not yet on board. They are expecting more big numbers. But management guided to a 6% comp, because historically that's close to what the company averaged.

As Nordstrom anniversaries those big double-digit comp store numbers, investors need to prepare themselves for the days when sales return to a more normal level. As the top-line momentum begins to slow, I think stock price appreciation will be hard to come by. The shares will stagnate as comps drop from double digits to mid-single digits.

Holding too many shares of Nordstrom could give you a case of affluenza.

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