Elevating Digital Retail And Expanding Networks To Enhance Growth Amidst Industry Challenges

Key Takeaways

• Enhancing online shopping and operational optimization is projected to boost sales and improve net margins through faster fulfillment and reduced costs.
  
• Expanding Nordstrom Rack stores and improving services like BOPUS aims to attract more customers, driving long-term revenue and earnings growth.
  
• Declining sales trends, inventory issues, high shrink levels, and uncertainties in the retail environment could negatively impact Nordstrom's revenue and profit margins.

Catalysts

A fashion retailer, provides apparels, shoes, beauty, accessories, and home goods for women, men, young adults, and children.

• Enhancements to the online shopping experience, such as improved search and discovery, are expected to drive continued digital sales growth, positively impacting revenue.
  
• Operational optimization initiatives, including faster fulfillment and delivery, are expected to enhance customer satisfaction and potentially improve net margins by increasing inventory turnover and reducing costs.
  
• Expansion of the Nordstrom Rack store network, with plans to open 20-25 new stores annually, is expected to attract new customers and drive revenue growth over the long term.
  
• Introduction of new services such as buy online, pick up in store (BOPUS) and store fulfillment for Rack digital orders is expected to boost sales and expand margins by enhancing the shopping experience and increasing convenience for customers.
  
• The emphasis on offering great brands at great prices in Nordstrom Rack is expected to maintain customer interest and improve sales, potentially leading to higher earnings by attracting a growing customer base.

Nordstrom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nordstrom's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $570.6 million (and earnings per share of $3.64) by about November 2027, up from $284.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $480 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2027 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Multiline Retail industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

Nordstrom Future Earnings Per Share Growth

Risks

• The noticeable decline in sales trends towards the end of October might indicate weakened consumer demand, which could adversely impact Nordstrom's future revenues.
  
• Inventory growth outpacing sales growth, particularly in seasonal categories like boots and sweaters, could result in increased markdowns, negatively affecting net margins.
  
• The continued challenge of high shrink levels (inventory loss due to theft or errors), if unaddressed, could suppress profit margins and overall earnings.
  
• The uncertain retail environment, including election noise and shifts in consumer confidence, might create unpredictability in sales, risking revenue stability.
  
• Potential softness in credit card revenues due to higher losses, despite higher balances, could impact overall net income and financial performance.

Valuation

• The analysts have a consensus price target of $22.32 for Nordstrom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.5, and the most bearish reporting a price target of just $13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $15.6 billion, earnings will come to $570.6 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $24.62, the analyst's price target of $22.32 is 10.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.