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  1. Home
  2. / Investing
  3. / Stocks

Wall Street Is Skeptical of Nordstrom's Stock Surge

Nordstrom may be nearing inflection but seeing is believing.
By KEVIN CURRAN Aug 22, 2019 | 10:52 AM EDT
Stocks quotes in this article: JWN

Nordstrom (JWN) stock is trending towards its best day in a year, but many stock watchers are questioning why such optimism is abounding after a guidance cut and slumping sales.

Shares of the Seattle-based high end retailer drove upward double digits on the open and continued strength in morning trading, building on Wednesday's gain that buoyed shares from decade lows.

Yet the company's outlook left quite a bit to be desired.

"We expect a sales decline of approximately 2% for the year versus the prior outlook range between a 2% decrease to flat growth," CFO Anne Bramman said. "The impact of tariffs has not been incorporated into our outlook, but we believe it will be relatively immaterial for the year."

While the bottom line beat and the big bet on e-Commerce is encouraging, that commentary and already declining sales suggest there is still much work to be done to sustain such a trend, beyond just margin improvements to generate profitability.

"We think JWN beat 2Q EBIT on cost cuts that are likely unsustainable," Credit Suisse analyst Michael Binetti said. "We think 2H sales and GM forecasts for the non-NYC business will need to be revised lower based on recent trends and negative read-throughs from the luxury channel."

While he said the prospect of the Nordstrom family taking the company private at a premium to the current valuation will likely put a floor in shares, he remained "Neutral" as more positive data will be necessary to keep investors onside in the long term.

Quite contrary to the stock implication, many analysts have begun cutting price targets after the EPS guide down and uncertainty about the firmness of a true turnaround.

"We see risk to JWN's plan for an inflection in profitability in the back half of 2019 and continuing through its five-year plan to 2022 given slowing same store sales at full line," J.P. Morgan analyst Matthew Boss said. "Given a volatile retail backdrop and a mixed management track record on profitability execution, we see JWN as a fundamental "show-me" story."

Boss lowered his price target to $26 per share from $29 despite the recent run, reiterating his "Underweight" rating on the stock.

Still, there was an argument to be made that skepticism is overdone, a theme the market appears to be picking up on.

"While many in the market are likely to remain skeptical given the big comp declines (-5% in 2Q), we are encouraged by the green shoots and early signs that Nordstrom is closer to a sustainable -- and profitable -- solution to the omnichannel equation in Softlines," Evercore ISI analyst Omar Saad said, taking the contrarian view. "There are signs that impressive gains in Buy Online Pick Up in Store (BOPUS) adoption (due to improved capabilities plus amplified customer communication) is a key factor behind the improving the profitability algorithm."

He reiterated a $45 price target on shares as he still sees room for improvement.

"Getting through 2Q - the most challenging quarter - with earnings and margins upside takes some pressure off of full year," Saad concluded.

Yet, with much of the positivity on the stock not set to materialize for months, there remains a healthy dose of skepticism on the Street overall, adding the rationale for a "wait and see" approach.

"We still question JWN's ability to generate EBIT growth (lowered top-end of guidance to $805M-$855M from $805M-$890M) in the midst of declining sales in an unfavorable and promotional apparel backdrop," Deutsche Bank analyst Paul Trussell advised clients. "We expect sentiment to remain quite negative on the name given lowered top-line outlook (guidance down ~-2% vs. prior -2% to flat) and lack of clarity around margin recapture long-term."

The charts don't offer much help after the recent acceleration either, especially as short covering contributes to the recent run, again providing caution for those compelled to chase.

"JWN is extended on the downside but we are likely to see it bounce in the short-run," Real Money technical analyst Bruce Kamich noted. "This strength is probably not going to last and further declines to new lows are expected in the months ahead."

For more on the chart action for the stock, click here.

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TAGS: Earnings | Investing | Markets | Stocks | Apparel | Consumer | Retail | E-Commerce | Analyst Actions | Stock of the Day

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