(By Mani) Nordstrom, Inc.
) has significant channels for growth, including square footage expansion plans for both the full-line stores and the Rack concept. In addition, comps could be driven by further e-commerce development, technology upgrades, merchandise and fashion-specific initiatives.
The retailer has a unique positioning in the department store sector, while also benefiting from its off-price Rack division. The full-line stores provide a solid bridge between the moderately priced department stores (Macy's, JC Penney) and the luxury department store space (Saks, Neiman Marcus) and offer customers a compelling assortment of contemporary brands and private label merchandise.
"We have completed a proprietary pricing survey and the results show JWN's full-line stores uniquely positioned in the department store landscape based on their merchandise offering and pricing matrix," RBC Capital Markets analyst Howard Tubin wrote in a note to clients.
Meanwhile, the Rack division offers additional opportunities both for business and for shares. Nordstrom is able to compete in the particularly compelling off-price sector, provide more of a value-oriented offering to the consumer, and attract a potentially more moderate income and younger shopper via its off-price Rack division.
The Rack is a significant part of the company's expansion plans and should add to square footage growth for the next several years. There are currently 110 Nordstrom Rack locations, representing around 42 percent of the total store count.
During 2011, 21 net new stores were opened, which included three full-line stores, 18 Rack stores, and the 2012 store opening plans call for one full-line opening and 15 Rack openings.
"We believe it (Rack) should contribute to a higher valuation for the shares," Tubin noted.
In addition, Nordstrom's customer service would bring more customers to its stores. Their department store model is based on providing their clientele with superior customer service, which adds to Nordstrom's differentiation in the space.
When looking at the shares, the recent selloff following first quarter earnings presents an attractive opportunity. Same-store sales growth remains positive, merchandise margin was flat, and the outlook for both the near- and long-term remains positive.
"While the shares are currently trading at 14-15x, in line with their two- and five-year average P/E, we believe a higher multiple is warranted based on the growth and increasing contribution from the Rack division," said Tubin, who has an "outperform" rating and $58 price target on Nordstrom shares.
Out of the 25 analysts covering the Nordstrom stock, 12 recommends "buy" or "strong buy"; 10 rate it as "hold" while 3 analysts have a "sell" rating on the stock.