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Equity Research / JWN | Page 2

Nordstrom Inc.

/ (JWN-NYSE)
Equity Research / JWN | Page 2
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 12/08/2009
Current Price (02/26/15) / $80.85
Target Price / $85.00
Nordstrom posted mixed fourth-quarter fiscal 2014 results, wherein the bottom line was disappointing while the top line exceeded expectations. Sales benefited from the company’s consistent store growth, flourishing customer strategy reflecting growth across channels and the Trunk Club acquisition. Moreover, we believe that Nordstrom’s constant focus on expansion, endeavors to keep up with the retail industry and strong financials, are likely to drive results, going forward. However, the company’s projections for fiscal 2015 reflect higher costs across the board due to the ongoing investments, which will likely weigh on margins. Moreover, we are cautious of its growth prospects due to the soft economic recovery, intense competition and exposure to seasonal fluctuations. Consequently, we retain our long-term Neutral recommendation on the stock.

SUMMARY

Equity Research / JWN | Page 2

SUMMARY DATA

52-Week High / $81.74
52-Week Low / $59.23
One-Year Return (%) / 33.57
Beta / 1.29
Average Daily Volume (sh) / 1,587,308
Shares Outstanding (mil) / 190
Market Capitalization ($mil) / $15,370
Short Interest Ratio (days) / 4.53
Institutional Ownership (%) / 56
Insider Ownership (%) / 6
Annual Cash Dividend / $1.48
Dividend Yield (%) / 1.83
5-Yr. Historical Growth Rates
Sales (%) / 10.0
Earnings Per Share (%) / 11.2
Dividend (%) / 15.8
P/E using TTM EPS / 21.7
P/E using 2015 Estimate / 21.3
P/E using 2016 Estimate / 19.2
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Growth
Industry / Retail-App/Shoe
Zacks Industry Rank * / 80 out of 267

OVERVIEW

Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private-label merchandise, which are positioned in the upscale segment of the industry and targeted toward the aspiring middle class. The company has two segments: Retail and Credit Card. The Retail segment offers a selection of brand names 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 Card segment operates Nordstrom private-label and co-branded VISA credit cards.

As of Feb 19, 2015, the Seattle-based company operated a network of 292 stores spanning across 38 states. These include 116 full-line stores in the U.S. and 1 in Canada, 167 Nordstrom Racks, 2 Jeffrey boutiques, 1 clearance outlet and 5 Trunk Club stores.

REASONS TO BUY

Ø Strong Brand Image: Nordstrom is one of the leading players in the extremely fragmented specialty retail sector. The company offers a broad array of over 500 brands, targeted toward the entire family, through a strong network of 292 stores situated across 38 states. Nordstrom, through its globally recognized brands, caters primarily to the upscale segment, enabling it to generate high-margin revenues. Nordstrom also appeals to its consumers by offering a more inclusive selection of quality merchandise, which further distinguishes it from other mall-based department store retailers.

Ø Focus on Men’s Business to Drive Growth: In a move to capture the rapidly growing men’s clothing market, Nordstrom recently completed the acquisition of Chicago-based provider of personalized clothing services for men, Trunk Club. We believe that the acquisition of this high-growth business strategically fits Nordstrom’s business model as is evident from the fact that it was one of the primary drivers of the company’s revenues in the fourth quarter of fiscal 2014. Going forward, we believe that Trunk Club will not only enhance the company’s capability to serve male customers, but will also help expand its online clothing services for men, in which it had invested in 2012 by acquiring Bonobos.

Ø Store Expansion and Canadian Venture to Boost Sales: Nordstrom continues to make incessant efforts with regard to its store-expansion strategy. These store openings, which have been in full swing, are expected to continue to drive Nordstrom’s top line, as in fiscal 2014. During the fiscal, the company marked its presence in Canada with the introduction of a full-line store. Alongside, it opened 2 other full-line stores, 27 Rack stores, purchased Trunk Club and launched Nordstromrack.com in the fiscal. Further, the company plans to keep up with this momentum and strengthen its presence in Canada. These strategic efforts should not only solidify its market share but also improve longer term top-line trends. The company will remain focused on further exploring the Canadian market, which has an estimated $1 billion sales opportunity with value-creating returns.

Ø Keeping Up with Retail Industry Trends & Focus on Customers: Nordstrom keeps up with the evolving retail industry that remains focused on offering maximum choices to customers to enhance their shopping experience. The company continues to efficiently allocate a major portion of its capital toward its multichannel growth strategy focused on improving its merchandise offerings; developing IT infrastructure to enhance web and mobile experience of customers; renovating stores with a modern look and developing fulfillment centers to enable speedy delivery to online customers. The company remains focused on making regular amendments to its clearance strategy in order to better manage its inventories, keep up with customer demands and provide them with a better experience over time. Also, we believe that the price integrity initiatives undertaken by the company will help in building a healthy relationship with customers, thereby enhancing customer loyalty.

Ø Solid Financial Status: Nordstrom enjoys a healthy financial status which lends the company the flexibility to reward shareholders and drive future growth. The company has been generating operating cash flows over $1 billion for six straight years now. Further, in fiscal 2014, the company returned nearly $860 million to its shareholders via dividends and share buybacks. The company recently hiked its quarterly dividend by 12% to $0.37 a share, reflecting management’s confidence in its future prospects. Also, during the fourth quarter, the company bought back about 0.7 million shares for about $56 million. As of the end of fiscal 2014, Nordstrom has nearly $1.1 billion worth of repurchases left under its ongoing program.

REASONS TO SELL

Ø Estimates Roll Down as Higher Costs Likely to Weigh on Fiscal 2015 Margins: Despite a solid fiscal 2014, the company’s projections for fiscal 2015 reflect higher costs across the board. Following the fourth quarter, where earnings missed the Zacks Consensus Estimate, the company anticipates a contraction in its gross margin and an increase in its selling, general and administrative (SG&A) expenses for fiscal 2015. Also, Nordstrom issued conservative earnings guidance for fiscal 2015, particularly for the first half. All of this is attributable to the impact of the Trunk Club acquisition and ongoing infrastructure investments, along with its Rack store expansion plans. Consequently, the Zacks Consensus Estimate for the first and second quarters, fiscal 2015 and fiscal 2016 witnessed a downtrend in the last ??.

Ø Macroeconomic Challenges: The apparel retail industry is consumer-driven and hence, very sensitive to the health of the economy. Spending on apparel and accessories is heavily dependent on the personal disposable income of consumers. The macroeconomic challenges such as high household debt and unemployment levels may restrain consumer spending on these items.

Ø Seasonal Risk: Nordstrom’s business is seasonal in nature and generates a high proportion of sales during the second and fourth quarters, which are characterized by the company’s anniversary and holiday season sales. As a result, Nordstrom is exposed to significant risks if the seasons fail to deliver the expected operating performance.

Ø Competitive Pressure: Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players such as The Gap Inc., Limited Brands Inc., Abercrombie & Fitch Co. and Saks Inc. The company primarily competes on the basis of fashion, quality and service. To retain its existing market share, the company may have to reduce its sales prices, which in turn can affect its margins.