December 18, 2015
Nordstrom Inc.
(JWN-NYSE)
$54.38*
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Repot: 3Q15 Earnings Update
Prev. Ed.: Sep 4, 2015; 2Q15 Earnings Update
Brokers’ Recommendations: Neutral: 50.0% (10 firms); Positive: 40% (8); Negative: 10% (2)
Brokers’ Target Price: $62.50 ( $15.00 from the last edition; 14 firms)
Prev. Ed.: 12; 7; 2
Brokers Avg. Expected Return: 14.9%
*NOTE: Though dated Dec 18, 2015, the share price and broker material are as of Nov 16, 2015.
Note: A flash update was done on Nov 12, 2015 on the 3Q15 Earnings Release
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the
Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did
not have accompanying spreadsheet models.
Note: We do not have access to ‘Sell’ reports
Portfolio Manager Executive Summary
Headquartered in Seattle, WA, Nordstrom Inc. (JWN) operates as a fashion specialty retailer in the U.S.
It sells apparel, shoes, cosmetics and accessories through Nordstrom, Nordstrom Rack, and Last
Chance retail stores, as well as through its website http://www.nordstrom.com and catalogs. The
company, through its federal savings bank, Nordstrom fsb, offers a private-label card, two co-branded
Nordstrom VISA credit cards, and a debit card for Nordstrom purchases.
Of the 20 firms rating the stock, 10 were positive, 8 were neutral, and 2 were negative on the stock.
The outlook of the firms toward Nordstrom is dealt with in the following paragraphs:
Neutral or equivalent outlook (50.0%; 10/20 firms): Despite holding a favorable long-term
fundamental outlook on the company, these firms remain cautious of the tough consumer environment,
competitive and promotional headwinds. The firms assume that consumers have a variety of options to
choose from for their spending and it may be difficult for Nordstrom to outperform peers in the market
due to the absence of its own private merchandise brand. Therefore, these firms think that it may take
time for the company’s extensive investments to yield results. However, they are encouraged by the
company’s top-line momentum, including sequentially improving comparable store-sales (comps) at
brick-and-mortar stores.
Though majority of these firms are hopeful about Nordstrom’s extensive investment plans, including
opening new stores in Canada, eCommerce growth and accelerated Rack expansion, some firms are
skeptical about these investments. These firms are concerned that this may hurt Nordstrom’s margins
and returns on invested capital (ROIC) in the short term.
© Copyright 2015, Zacks Investment Research. All Rights Reserved.
While the firms are encouraged about the holiday season sales, some of these anticipate softness in
the company’s apparel sales to continue in 2016, which along with the impact from Nordstrom’s Credit
Card portfolio sale, will likely weigh on its overall performance.
Positive or equivalent outlook (40.0%; 8/20 firms): These firms believe that Nordstrom offers various
assortments with an unmatched level of customer service in the department store industry, that will help
the company maintain its high sales growth rate. The firms also point out that Nordstrom has a flexible
operating expense model (i.e. commissioned sales force) than its peers, that enables it to lower selling,
general and administrative (SG&A) expenses as sales decline.
The firms further state that Nordstrom's focus on price integrity and superior customer service will boost
growth, resulting in market leadership, strong brand recognition and relevance, and a healthy
eCommerce retail environment. The company will thus benefit from improved consumer sentiment and
increased demand.
Further, the bullish firms appreciate the company’s long-term vision to provide customers with a
differentiated, seamless multichannel experience. In this regard, Nordstrom remains focused on
developing the multichannel network; improving its merchandise offerings; developing IT infrastructure
to enhance customer’s web and mobile experience; renovating stores with a modern look; developing
fulfillment centers to enable speedy delivery to online customers; implementing an enterprise-wide
inventory management system as well as enhancing relationships with existing and new customers.
Most of the firms believe that these initiatives will go a long way to open up multiple growth avenues for
the company.
The firms also remain impressed by Nordstrom’s strong balance sheet and ample free cash flow
generation, which provide sufficient cash for future investments.
December 18, 2015
Overview
The firms identified the following issues as critical to the evaluation of the investment merits of
Nordstrom:
Key Positive Arguments
 Nordstrom’s continued focus on differentiating its
assortments provides it with a competitive edge.
 The company has high visibility into its future
opportunities, including the opening of new stores in
FY15 and beyond.
 Nordstrom is committed toward improving its
customer service.
 Improved performance of the women’s apparel
section, revamping of the Savvy department,
introduction of some exclusive brands and
enhancement of the Fashion Rewards program are
likely to boost sales volume.
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Key Negative Arguments
 Merchandising errors and execution risks are
always associated with the implementation and
utilization of new systems.
 Any potential weakness in the high-end consumer
market and the lack of square footage growth
could have a negative impact on the company’s
earnings.
 Changing fashion trends and markdown risk
remain threats to the company.
 Nordstrom operates in a highly competitive
backdrop, where the target customers have a
multitude of retail options.
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Based in Seattle, WA, Nordstrom Inc. (JWN) is one of the nation's leading fashion specialty retailers.
Founded in 1901 as a shoe store in Seattle, Nordstrom operated 323 stores across 38 states of the
U.S. and Canada as of Dec 1, 2015. The company has two segments: Retail and Credit. The Retail
segment offers a selection of branded and private-label merchandise. The segment includes Nordstrom
branded full-line stores and website, off-price Nordstrom Rack stores, and other retail channels
including HauteLook and Jeffrey boutiques. The Credit segment operates Nordstrom private label and
co-branded VISA credit cards. The company’s fiscal year ends in January.
December 18, 2015
Long-Term Growth
Nordstrom’s strong line-up of globally recognized brands acts as a competitive advantage for the
company, 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.
The firms maintain that Nordstrom has developed a differentiated business model known for its
emphasis on customer service and its large footwear department. It focuses on providing a quality
customer experience via personalized service, a compelling merchandise offering and a pleasant
shopping environment. Nordstrom also appeals to its consumers by offering a broader, more inclusive
selection of quality merchandise, which further distinguishes it from other mall-based department store
retailers.
Additionally, Nordstrom’s business is in line with the evolving retail industry that focuses on offering
maximum choices to customers to enhance their shopping experience. The company also makes
regular amendments to its clearance strategy to better manage its inventories, keep up with customer
demands and provide them with a better shopping experience. In addition, the price integrity initiatives
undertaken by the company are likely to help build healthy relations with customers, thereby enhancing
customer loyalty.
Furthermore, the firms have appraised the company’s acquisition of Trunk Club, a provider of
personalized clothing services for men, as this will help Nordstrom in capturing market share in the
rapidly growing men’s clothing business. The firms believe that the acquisition strategically fits
Nordstrom’s business model, as it will allow the company to better serve its male customers and
facilitate the expansion of its online clothing services for men, its initial investment in which dates back
to 2012 when it acquired Bonobos.
The firms are of the opinion that Nordstrom is poised to augment its sales, given its eCommerce
enhancement endeavors, the successful expansion of Rack Stores, growth in Canada and multichannel investments. Moreover, the firms think that Nordstrom’s focus on building customer loyalty and
its initiatives to create a customer-friendly shopping environment will drive sales in the future.
Additionally, the firms commend the company’s efforts to attract technology-friendly consumers by
enhancing its mobile commerce sites, social networking, and in-store capabilities.
Moreover, the company’s latest capital expenditure plan reveals its stringent focus on improving its
market share by increasing investment in stores. Going forward, the company plans to continue making
significant investments to support growth in Canada and Manhattan as well as its eCommerce business
and Rack Stores. With these initiatives underway, the company is well on track to achieve its target of
operating 300 Rack stores by 2020.
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Additionally, the company looks forward to further leveraging its strategic capacities by undertaking
enhancements in supply chain, technology, merchandise and marketing. These in turn will drive
fundamental growth.
December 18, 2015
Target Price/Valuation
Rating Distribution
Positive
Neutral
Negative
Average Target Price
Digest High
Digest Low
No. of Firms with Target Price/Total
50.0%
40.0%
10.0%
$62.50
$80.00 
$45.00
14/20
Risks to the target price include deterioration in the consumer-spending environment, slowdown in
comps growth, and fashion-related risks in a seasonal, cyclical and trend-focused sector.
Recent Events
On Nov 12, 2015, Nordstrom reported dismal 3Q15 results. Nordstrom’s quarterly adjusted earnings of
$0.57 per share came in way below the Zacks Consensus Estimate of $0.71 and plunged 21.9% from
the prior-year quarter figure of $0.73. Nordstrom’s total revenue rose 6% to $3,328 million, but missed
the Zacks Consensus Estimate of $3,371 million.
On Nov 5, 2015, Nordstrom announced plans to shift its Howe Bout Arden Rack store to a remodeled
place in the Sacramento, CA center. Spanning over roughly 35,000 square feet, the relocated store is
slated to open doors in fall 2016.
On Oct 23, 2015, Nordstrom opened its first full-line store in Wisconsin. The new three-level store is
housed at the Mayfair in Wauwatosa and spans over 140,000 square feet.
On Oct 13, 2015, Nordstrom announced plans to employ roughly 11,800 seasonal workers to handle
the crazy holiday rush. The improved staffing was expected to facilitate better customer service during
the busy time of the holidays.
On Oct 9, 2015, Nordstrom announced the opening of its relocated store at Del Amo Fashion Center.
This store was previously situated at South Bay Galleria.
On Oct 2, 2015, Nordstrom opened its second full-line store in the Twin Cities, that is, the MinneapolisSaint Paul metropolitan area in Minnesota. Located at Ridgedale Center in Minnetonka, the store
features the company’s latest interior and exterior design concepts, while accommodating a full-service
restaurant and bar, and improved beauty experience.
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On Oct 1, 2015, Nordstrom announced a special dividend and increased its share repurchase
authorization. These moves followed the sale of its credit card portfolio to The Toronto-Dominion Bank
(TD Bank). (Further details discussed in the relevant section).
Revenue
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue($M)
3Q14A
2Q15A
3Q15A
4Q15E
2014A
2015E
2016E
Digest High
$3,140.0
$3,701.0
$3,328.0
$4,398.0
$13,507.0
$14,642.0
$15,850.0
Digest Low
$3,140.0
$3,701.0
$3,328.0
$4,236.0
$13,506.0
$14,480.0
$15,272.0
Digest Average
$3,140.0
$3,701.0
$3,328.0
$4,300.7
$13,506.1
$14,544.7
$15,523.3
Y-o-Y Growth
8.9%
9.1%
6.0%
6.4%
7.7%
7.7%
6.7%
Q-o-Q Growth
-7.4%
15.1%
-10.1%
29.2%
The Zacks Digest average total revenue increased 6% year over year (y/y) to $3,328 million in 3Q15,
backed by an increase in Retail sales, partly offset by a decline in Credit Card sales.
Segment Details
Retail
Net sales at the company’s Retail division increased 6.5% to $3,239 million, while its Credit Card
revenues slumped 11% to $89 million.
Net sales at the company’s full-line stores slipped 1.9%, while sales at Rack stores were up 8.4%.
Coming to the company’s online business, Nordstrom.com sales for the quarter jumped 11% and
Nordstromrack.com/HauteLook net sales soared 39%, maintaining the trend of beating expectations.
Additionally, off-price business net sales ascended 12% y/y.
Total company comps inched up 0.9% in the quarter. Further, the company registered a 0.3% rise in
comps at Nordstrom full-line stores (which consist of full-line stores and the Nordstrom.com
businesses), while comps at Nordstrom Rack reflected a 2.2% decline.
Apart from this, sales continued to receive significant contribution from the Nordstrom’s Rewards loyalty
program, which accounted for about 38% of sales during 3Q15.
Credit Card
Credit card revenues were down 11% to $89 million.
On Oct 1, 2015, Nordstrom closed the sale of its credit card portfolio to The Toronto-Dominion Bank
(TD Bank) for $2.2 billion. Also, per a long-term agreement between the two companies, TD Bank
became the exclusive U.S. issuer of Nordstrom-brand Visa and private-label credit cards.
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Nonetheless, Nordstrom will continue to receive a significant portion of revenues from the credit card
accounts. Further, the company will retain its right to perform account-servicing functions, as well as
fund and manage its loyalty program, debit cards and employee accounts. The deal is expected to
improve Nordstrom’s capital efficiency in addition to enhancing customer experience.
Provided below is a summary of segment revenues as compiled by Zacks Research Digest:
Revenue ($M)
3Q14A
2Q15A
3Q15A
4Q15E
2014A
2015E
2016E
Net Sales
Credit Card
Revenue
Total Revenue
$3,040.0
$3,598.0
$3,239.0
$4,230.0
$13,111.0
$14,182.0↓
$15,234.0↓
$100.0
$103.0
$89.0
$70.3
$395.1
$362.3↓
$289.7↓
$3,140.0
$3,701.0
$3,328.0
$4,300.7
$13,506.1
$14,544.7↓
$15,523.3↓
Guidance
Nordstrom remains focused on the execution of its customer strategy via various growth initiatives, in
order to enrich customer experience and boost results.
However, taking into account the disappointing 3Q15 results and the expected impact from the credit
card portfolio sale, the company lowered its guidance for FY15.
The company now expects net sales to increase nearly 7.5–8.0% in the fiscal compared with 8.5–9.5%
growth projected earlier. Comps are estimated to rise about 2.5–3.0% against 3.5–4.5% improvement
expected previously.
Please refer to the separately published spreadsheet of Nordstrom for additional details & updated forecast.
Margins
Provided below is the summary of margins as compiled by Zacks Research Digest:
Margin
3Q14A
2Q15A
3Q15A
4Q15E
2014A
2015E
2016E
Gross Margin
34.4%
34.3%
33.0%
35.8%
34.8%
34.5%↓
35.1%↑
Operating Margin
8.3%
9.4%
5.1%
9.5%
9.8%
8.2%↓
7.9%↓
Pre-Tax Margin
7.3%
8.7%
4.2%
8.8%
8.8%
7.4%↓
7.0%↓
Net Margin
4.5%
4.9%
3.3%
5.3%
The Zacks Digest average gross profit increased 1.7% y/y to $1,097 million in 3Q15, while the gross
margin contracted 140 basis points (bps) to 33%, mainly due to greater markdowns, higher occupancy
expenses and unfavorable mix at Nordstrom Rack.
SG&A expenses, as a percentage of sales, escalated 80 bps to 30%, primarily due to expenses related
to the Trunk Club acquisition and the Canadian venture, along with higher fulfillment expenses
associated with the expansion of online footprint.
Consequently, the Zacks Digest average operating income plunged 35.6% to $168.7 million, with the
operating income margin contracting 320 bps to 5.1%.
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Guidance
For FY15, gross margin is anticipated to decline in a range of 50–60 bps, compared with the previous
guidance of a -5 to +5 bps range. SG&A expenses, as a percentage of sales, are expected to grow 70–
75 bps, compared with the previous forecast of a 65–75 bps increase.
Please refer to the separately published spreadsheet of Nordstrom for additional details & updated forecast.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS
3Q14A
2Q15A
3Q15A
4Q15E
2014A
2015E
2016E
Digest High
$0.73
$0.93
$0.57
$1.33
$3.72
$3.45↓
$3.80↓
Digest Low
$0.73
$0.93
$0.55
$1.33
$3.71
$3.45↓
$3.80↓
Digest Average
$0.73
$0.93
$0.57
$1.33
$3.72
$3.45↓
$3.80↓
Y-o-Y Growth
5.3%
-2.1%
-22.2%
1.0%
0.2%
-7.3%
10.4%
Q-o-Q Growth
-23.2%
41.6%
-39.0%
134.3%
The Zacks Digest average earnings per share in 3Q15 were $0.57, down 22.2% y/y and 39%
sequentially. Results were impacted by soft sales trends across all networks and merchandise
categories. Firms believe that this was partly attributable to unfavorable weather and a shift in
consumer patterns.
Including $0.15 of transaction costs associated with the credit card portfolio sale to TD Bank,
Nordstrom’s earnings per share came in at $0.42.
Guidance
The company envisions earnings per share for FY15 in the range of $3.32–$3.42, compared with the
previous guidance of $3.85–$3.95. Excluding the impact of the credit transaction and other one-time
items, earnings per share are expected in the band of $3.40–$3.50, down from $3.70–$3.80 projected
earlier.
Please refer to the separately published spreadsheet of Nordstrom for additional details & updated forecast.
December 18, 2015
Research Analyst
Vrishali Bagree
Copy Editor
Content Ed.
Oindrila Ghoshal Dutta
Rajani Lohia
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Lead Analyst
Rajani Lohia
QCA
No. of brokers reported/Total
brokers
Reason for Update
Sumit Singh
Zacks Investment Research
20/20
Earnings
Page 8
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