One of the most difficult stock market sectors for investors to gauge in recent years has been the retail sector. There’s no question traditional retailers like Nordstrom, Inc. (ticker: JWN) are facing unprecedented online competition, but some analysts say Nordstrom’s outlook isn’t as bleak as the market seems to think.
UBS analyst Jay Sole says mall retailers like Nordstrom are too bloated and need to shrink their store footprint further. However, he says stores will continue to play a large role in the retail market as a complement to e-commerce sales.
“The market has exaggerated the ‘stores are dead’ idea, in our view,” Sole says.
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Sole says investors are way too bearish on Nordstrom at this point.
Nordstrom, Sole says, has consistently gained market share from competitors since 2011. UBS is expecting Nordstrom to average 3.3 percent sales growth in coming years, well above the industry average of 2.2 percent.
Earnings growth, on the other hand, may be a bit more challenging. But Sole says Nordstrom is well-positioned to expand its margins from 6 percent in fiscal 2017 to 7.8 percent by fiscal 2022.
“We think major eCom investments have weighed on margins, but the company is closer to leveraging these than the Street thinks,” Sole says.
Over the next five years, UBS is forecasting impressive compound annual earnings per share growth of 14 percent. Sole says that growth should be enough to reassure investors and expand Nordstrom’s earnings multiple from around 14 to the 18 range.
A big part of Nordstrom’s ability to grow earnings and margins will depend on how much cash it must invest to fend of Amazon.com ( AMZN) and other competitors. Unfortunately, Bank of America analyst Lorraine Hutchinson says Nordstrom is squarely in Amazon’s crosshairs.
“Our survey data highlights that department stores’ need to invest will persist and constrain [earnings before interest and taxes] margin growth,” Hutchinson says.
“We think this will weigh most on upper mid-tier department stores like Nordstrom, Macy’s ( M) and Dillard’s ( DDS) that are more likely to overlap with Amazon Prime consumers.”
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The wide range of analyst expectations for Nordstrom reflects the unpredictable retail environment. UBS has a “buy” rating for Nordstrom, and its $69 price target represents more than 30 percent upside. Bank of America has an “underperform” rating and $48 target for JWN stock, representing 9 percent downside.
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Wall Street Can’t Figure Out Nordstrom, Inc. (JWN) Stock originally appeared on usnews.com
