Nordstrom Commands Premium Valuations Compared to Department Stores
Nordstrom Beats Sales Estimates but Delivers Mixed Results in 1Q15
Share performance
Nordstrom (JWN) announced its 1Q15 results after the close of financial markets on May 14. The company’s share price appreciated by 0.9% on May 15. As we discussed in parts 1 and 2 of this series, Nordstrom exceeded analysts’ sales estimates but lagged analysts’ earnings estimates for 1Q15.
However, Nordstrom’s share price has declined by 4.6% to $74.80 year-to-date (through May 15).
Nordstrom’s valuation versus peers
As of May 15, 2015, Nordstrom was trading at a forward price earnings (or PE) multiple of 19.2x, down 1.1% since the beginning of 2015. Nordstrom constitutes ~0.5% and 0.1% of the Consumer Discretionary Select Sector SPDR Fund (XLY) and SPDR S&P 500 ETF (SPY), respectively.
Nordstrom is trading at higher valuations compared to department store rivals Kohl’s Corporation (KSS) and Macy’s (M), which were trading at forward PE multiples of 14.2x and 13.7x, respectively, as of May 15. Kohl’s valuations dropped by 13.1% on May 14, as the company missed analysts’ revenue estimates. Macy’s missed analysts’ 1Q15 sales and earnings estimates.
Nordstrom has recently delivered better performance than its rival department stores, primarily due to its timely expansion into the off-price and online businesses.
However, Nordstrom is trading at lower valuations compared to off-price retailers and the consumer discretionary sector. TJX Companies (TJX) and Ross Stores (ROST) were trading at forward PE multiples of 19.4x and 20.1x, respectively, as of May 15. The S&P 500 Consumer Discretionary Index was trading at a forward PE multiple of 20.1x as of May 15.
Factors playing on future valuations
Nordstrom’s planned expansion into Canada, its strategic acquisitions (like its Trunk Club acquisition), and the accelerated opening of Rack stores should benefit the company’s future sales. However, the company’s significant capital expenditure might continue to affect its bottom line in the near future. For fiscal 2015, analysts expect Nordstrom’s planned capital expenditure, net of property incentives, to come in at $1.2 billion—a 60.0% increase compared to fiscal 2014. The company believes that these investments are necessary to achieve its goal of delivering over $20.0 billion in sales by 2020.
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