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Nordstrom Q4 Earnings: Balance Sheet Still Needs Improvement (NYSE:JWN)

Nordstrom Shares Fall After Lackluster Earnings Report

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Nordstrom (JWN) reported quarterly income of $4.49 billion and GAAP EPS of $1.23. The firm beat on income by $130 million and in addition beat on GAAP EPS. JWN is up within the double-digit-percentage vary post-earnings. I had the next takeaways on the quarter.

Top Line Growth Was Phenomenal

Earnings season has been hit and miss for a number of retailers for the vacation season, however is was a fairly robust quarter for Nordstrom. It is tough to determine if the efficiency was because of the vagaries of the vacation season or if it will likely be a long-term development. That mentioned, Nordstrom’s prime line development was phenomenal, with 23% Y/Y income development.

The firm fired on all cylinders as each the full-price and off-price segments grew within the double-digit proportion vary. I anticipated the off-price phase to carry out nicely as shoppers may very well be extra cost-conscious than ordinary as we come out the pandemic. However, I used to be shocked by the robust full-price efficiency.

Nordstrom revenue growth

Nordstrom income development (Shock Exchange)

During the earnings name management talked up the off-price phase’s (Nordstrom Rack) skill to supply sure manufacturers at affordable costs:

Starting with Nordstrom Rack, final quarter we undertook a radical evaluation of the enterprise and developed prescriptive plans to optimize the client expertise and enhance our efficiency. As we raised stock ranges and improved common worth factors in our shops, we posted a sequential gross sales enchancment of 320 foundation factors within the fourth quarter. Though we’re within the early levels of implementation, the Rack outcomes and bettering retailer buyer satisfaction scores reaffirm our confidence within the plans we have outlined.

Nordstrom Rack has a singular mixture of manufacturers with restricted distribution within the off-price sector. Customers are drawn to the Rack to buy wanted manufacturers at a terrific worth. Rack faces a singular problem as off-price procurement of the identical prime manufacturers we feature at Nordstrom is especially tough within the present atmosphere with manufacturing constraints and decrease ranges of clearance product.

However, administration braced traders for the potential that it may very well be tough for the corporate to acquire the identical prime manufacturers clients have change into accustomed to. If that occurs, the off-price phase may lag within the first a part of the calendar 12 months.

That mentioned, I used to be relatively impressed with the full-price phase and Nordstrom’s digital gross sales. Digital gross sales grew over 20% throughout the quarter and whole digital penetration elevated to over 44%. The on-line success of Nordstrom.com and NordstromRack.com may assist Nordstrom differentiate itself from different off-price retailers like Burlington Stores (BURL) or Ross Stores (ROST). The firm’s bodily places now serve a twin function as achievement facilities additionally.

The firm’s Buy Online Pick Up In Store function has been a success with clients, but it depends on Nordstrom’s bodily places in densely populated areas that provide comfort for purchasers. Customers using the in-store pickup choice truly spend greater than clients who don’t. That makes the full-price phase and Nordstrom’s bodily retailer places central to the corporate’s development and skill to compete with Target (TGT), Walmart (WMT) and Kohl’s (KSS).

Margins Improved

One would assume that added scale would result in increased margins for Nordstrom. However, that’s not all the time the case for retailers. Some retailers should low cost product to drive foot site visitors into shops or incur increased SG&A prices relying on how a lot income comes from digital companies. During the quarter Nordstrom reported gross revenue of $1.7 billion, up 41% Y/Y. Gross margin was 38.4%, up 500 foundation factors versus that of the year-earlier interval. Rising income and growing gross margin triggered the spike in gross revenue on a greenback foundation.

SG&A prices had been $2.7 billion, up 19% Y/Y. SG&A grew lower than income, which created extra efficiencies. SG&A as a proportion of income was 34.0%, down from 35.2% within the year-earlier interval. Management indicated it rationalized its overhead price construction in 2020. The numbers may point out Nordstrom is less-inefficient as we speak than it was in 2020. That ought to pay dividends, assuming the corporate can proceed to develop income.

Its rising digital gross sales probably didn’t come with out a price. Digital gross sales result in increased achievement prices, increased prices to take care of the corporate’s on-line platform and better companies associated to purchase on-line pickup in retailer actions. How environment friendly or inefficient Nordstrom is pursuant to its digital channel is tough to glean. However, administration indicated it started provide chain optimization efforts throughout the quarter.

Amazon (AMZN), Walmart and Target are miles forward of different conventional retailers pursuant to provide chain optimization. American Eagle (AEO) lately acquired Quiet Logistics to assist enhance its provide chain optimization. It may behoove Nordstrom to associate with or look to amass an organization with provide chain experience with a view to enhance its distribution companies and change into extra environment friendly in actual time.

EBITDA for the year-ended January 2022 was $1.0 billion, up from a $325 million EBITDA loss within the year-earlier interval. EBITDA margin was 7%; although not best-in-class, it was nonetheless a marked enhance over the earlier 12 months’s efficiency. Nordstrom’s skill to drive prime line development and drive site visitors to its digital platform in a cost-efficient method is commendable. Its off-price phase may very well be a differentiating issue within the firm’s skill to repeat the efficiency going ahead.

Nordstrom’s Balance Sheet Still Needs Improvement

Nordstrom ended the quarter with $322 million in money, down from $681 million within the year-earlier interval. Inventory was $2.3 billion, up over 20% versus the $1.9 billion reported within the year-earlier interval. Retailers should strike a steadiness between having sufficient stock throughout the vacation season and never being left with stale stock tough to promote down the highway. Nordstrom could have failed on this metric throughout the quarter. By administration’s personal admission, attire and sneakers, which make up the lion’s share of Nordstrom’s enterprise, weren’t again to 2019’s degree. This could have harm stock circulation; in my view, this has been an issue for a while.

Working capital was -$142 million, an enchancment over -$478 million from the year-earlier interval. However, present belongings embrace a heightened degree of stock, which can be tough to promote down. Closing this capital gap ought to be paramount for the corporate, but administration is having formal discussions of returning capital to shareholders:

Our third precedence is returning money to shareholders. Subject to completion of our year-end audit and the associated certification course of with our financial institution group, we anticipate to be in place to renew returning money to shareholders within the first quarter. We anticipate finishing that course of by mid-March and discussing with our Board shortly thereafter the resumption of a quarterly dividend at an applicable charge.

Returning capital to shareholders when Nordstrom is in my view, under-capitalized, is wrongheaded. It illustrates that both administration could not deem its under-capitalized steadiness sheet as an issue. However, till Nordstrom closes its capital gap it might be tough to make a believer out of the market.

Nordstrom valuation

Nordstrom valuation (Shock Exchange)

Nordstrom has an enterprise worth of $6.5 billion, together with its destructive working capital of $142 million. It trades at 6.4x full-year EBITDA of $1.0 billion, which is beneath my vary of 8x-10x for cyclical names. JWN could not commerce increased till it will probably shut its capital gap and show it will probably persistently develop income and EBITDA amid an unsure economic system.

Conclusion

JWN is down over 30% Y/Y. The inventory may stay uneven as broader markets could have peaked. I charge the inventory a maintain till administration can enhance its steadiness sheet.

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