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I've been a huge bull on beaten-up retail stocks over the past year. The narrative has sharply reversed course from Amazon (NASDAQ: AMZN ) killing all of retail to traditional retailers fighting back by remodeling their stores, building out omni-channel sales capability, incorporating more loyalty perks, and discounting prices to reasonable-yet-attractive levels.
The net result has been largely improved results across all of retail. A few years back, every retailer was reporting negative comparable sales growth and margin compression. Now, the norm in retail is positive comparable sales growth, driven by robust digital sales growth, and margin expansion off recent lows.
In response, retail stocks are in rally mode. Names such as Macy's (NYSE: M ), Kohl's (NYSE: KSS ), Urban Outfitters (NASDAQ: URBN ) and Abercrombie & Fitch (NYSE: ANF ) are all up more than 60% over the past year.
But one retailer that has missed out on this rally is Nordstrom (NYSE: JWN ). Over the past year, JWN stock is up just 6%.
Why has JWN stock sat out this big retail rally? Mostly valuation concerns. Those valuation concerns reared their ugly head recently. Management gave a solid long-term update on sales and earnings growth outlook at the company's Investor Day. But, JWN stock dropped sharply in response.
While this recent dip may present a buying opportunity, I really don't think JWN stock is worth much more than $55 today.
Here's a deeper look.
Why Nordstrom Stock Has Missed the Retail Rally
Everything in retail is improving right now.
Nordstrom is no exception to that broad trend. Comparable sales growth has inflected into positive territory, and the trend is presently upward. The worst of margin compression from sales deleverage and discounting appears to be in the rear-view mirror. The digital and off-price businesses appear to be doing really well. The outlook for long-term sales and earnings growth is improving, and management is guiding for 3-4% sales growth and 5-6% EBIT growth over the next five years.
Overall, the numbers are improving at Nordstrom, just like they are improving elsewhere in retail. But JWN stock isn't rallying like other retail stocks.
Other retail stocks were priced for death a year ago. Macy's stock was trading at around 7-times forward earnings. Kohl's stock was trading just under 10-times forward earnings, and Urban Outfitters stock was trading just over 10-times forward earnings.
Thus, when the numbers got better at Macy's, Kohl's and Urban Outfitters, those stocks took off like rocket ships.
But a year ago, JWN stock was trading at 16-times forward earnings. That isn't a death multiple. It is actually a market-average multiple, so JWN stock was already priced for operational improvement. Thus, as the numbers have improved over the past several quarters, JWN stock hasn't gone anywhere.
Nordstrom Stock Isn't Worth Much More Than $55
Today, JWN stock trades at just under 15-times forward earnings. That isn't that cheap. But it also isn't that expensive, and the fundamentals are improving.
Sales growth is now consistently back in the picture at JWN. Management is targeting 3-4% sales growth per year over the next several years. I think that is very doable, considering the long-term average sales growth rate at JWN is around 5%.
Management is also targeting EBIT growth of 5-6% per year over the next several years. That implies EBIT margins to rise to about 6.5% in five years. That also seems doable. EBIT margins were 11.1% five years ago, but have since tumbled to 6.1%. There are signs that EBIT margins are normalizing, and as such, a conservative rebound to 6.5% over the next five years seems likely.
Under the assumption that sales growth runs around 3-4% per year and EBIT margins rebound towards 6.5%, I think Nordstrom can net around $4.80 in earnings per share in five years. A market-average 16 forward multiple on that implies a four-year forward price target of about $77. Discounted back by 10% per year, that equates to a present-day value in the lower-$50s.
Bottom Line on JWN Stock
Retail stocks are in rally mode. But JWN stock has missed the rally because of a stretched valuation. Unfortunately, the valuation remains big today. Granted, the numbers are improving, but such improvements will lead to mitigated stock price appreciation - thanks to the already big valuation.
As of this writing, Luke Lango was long M, KSS, and ANF.
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