The idea that Nordstrom (JWN) shares are a must-own because the shoe department has superior customer service and the brand's expansion is tightly managed is long in the tooth. Well, of course expansion is measured -- shopping malls aren't exactly springing up every other day in this economy. AAnd the footwear factor is overrated: The luxury consumer doesn't need to be talked into a pair of Jimmy Choos (the aspirational customer, though, or the one who really shouldn't be in Nordstrom to begin with, requires that extra push). In fact, channel checks over the years have shown me that the shoe department's customer service is definitely not on par with the level of bedside manner found at a New York City or Los Angeles boutique.
You may be wondering where my vitriol stems from, but it's really quite simple. I have listened to the positive attributes on Nordstrom time after time, leading investors to bid the stock up into earnings, only to watch their positions get swiped like a maxed-out Amex card when the actual numbers are released. No mas.
Now, one might think that recent strong earnings reports from Visa (V), American Express (AXP), Polo Ralph Lauren (RL) and Coach (COH) would have supported Nordstrom's bumbling along stock price -- not so. In fact, Nordstrom shares have severely lagged most companies in the luxury goods sector.
Four-Week Stock Returns
- American Express: +4.12%
- Nordstrom: +4.74%
- Saks: +19.3%
- Visa: +13%
- Polo Ralph Lauren: +20%
- Coach: +20%
So we have a "best in breed" retailer whose stock price is signaling something negative on the fundamental front, in my view. Remember also that Polo Ralph Lauren and Tiffany (TIF) (preannouncement) noted slower tourist spending in the quarter. Hmm. From my standpoint, here's the root of Nordstrom's stock underperformance:
- Same-store sales growth is on a downward trajectory following eight quarters or so of stellar outcomes. Normally I would be willing to give a retailer a pass on slowing comps as long as gross profit margins were expanding nicely and expenses being dutifully managed. But Nordstrom has decided to offer free shipping on standard purchases and returns online, which chips away at gross margins. That is the first negative. Second is Nordstrom's increased level of spending to support its newest acquisition of Hautelook and Rack store openings (which triggered a spike in third quarter capex).
- 2012 guidance is a bit soft. Nordstrom has historically opted to not be too aggressive with its full-year guidance. I find it telling that in 2011 when many retailers materially outperformed their initial 2011 earnings expectations, Nordstrom will end up beating only slightly (initial estimates of $2.95-$3.05 a share vs. final somewhere between $3.05 and $3.10 a share; the company only raised projections after third-quarter results). This relative underperformance underscores the investments being made in the business (having Amazon flashbacks). The Street has a tendency to underestimate a retailer's investments designed to lay the groundwork for future growth, and given the infatuation with Nordstrom's overall business, there may be a disconnect between reality (cautious 2012 guidance) and the fiscal-year estimate currently outstanding ($3.58 per share).
I could easily see analysts come out Friday morning following the Thursday evening release with notes titled "Love the Top Line, but Investment Spending Causes Us to Trim FY Estimates," or something in that vicinity. Avoid being swept into this bet-hedging party, and watch Nordstrom's earnings from afar.
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