Nordstrom’s (NYSE:JWN) stock gained 4.07% of its market value last year, while the broader market has lost 16.82%. However, I see a lot of bullish signals for this company. JWN stock, in my opinion, should be purchased for various reasons, including an enhanced business plan, recovering financials, shareholder-friendly initiatives, and more. Let’s have a look at the main reasons for my optimistic view.
Company’s Activity
After the first quarter of 2022, one of Nordstrom’s key strategic priorities will be to upgrade its merchandise strategy to increase consumer stickiness. Nordstrom is focused on evolution, which includes a new retail strategy for improving supply chain efficiencies, digital capabilities, building handy local locations, and, most importantly, partnerships to drive development. I am particularly bullish about Nordstrom following the effective deployment of their recent agreement with retailers Allbirds and ASOS in late May. Here’s a good remark from Tacey Powers, Executive VP and General Merchandising Manager of Shoes, demonstrating the company’s perspective:
Partnering with a sustainability pioneer like Allbirds enables Nordstrom to better deliver on our brand promise of providing the most relevant assortment from the brands that matter most to our consumers. We are excited to increase our Sustainable Style assortment and grow our cooperation with a distinctive and values-driven brand.
Furthermore, investors will be pleased to observe Nordstrom’s dedication to shareholder value, shown in the company’s Q1 2022 earnings call report: capital allocation priorities. Nordstrom’s Board of Directors authorized a $500 million share repurchase program on May 24th. This is most likely due to management’s recognition of the company’s current undervaluation, and it demonstrates their trust in the company’s financial health and future prospects. This makes the stock more financially appealing, and Nordstrom is already earning high sales and EBITDA values compared to the sector median.
Valuation
Nordstrom is financially stable, and indicators such as revenue are predicted to expand in the double digits (exceeding pre-pandemic levels) with outstanding free cash flow margins. As a result, to obtain the most accurate results, I chose to apply the Discounted Cash Flow method with a more conservative approach. To use the most recent FCF number, I based my model on a $780 million free cash flow ttm (from Yahoo Finance) (their fiscal year numbers would not account for recent data from 2022).
Then, using a cautious assumption of 0% for the terminal and FCF annual growth rates, I arrived at an intrinsic price of $38.50, reflecting a 63.6% premium over the current market price. Partnership opportunities are already producing outstanding outcomes, and growth rates may be substantially higher than my present modest estimate. I believe that this stock is significantly undervalued by the market and represents an excellent purchase opportunity, provided that the intrinsic value remains significantly higher than current market values despite cautious assumptions.
Risk Headwinds
The impact of rising consumer worry about inflation, and their financial well-being is the most significant danger I see for Nordstrom. The Consumer Sentiment/Confidence and Expectations indicator in the United States has recently reached new lows. Lynn Franco, Senior Director of Economic Indicators at The Conference Board, summarizes this movement in consumer mood.
While the Present Situation Index remained largely stable, the Expectations Index maintained its recent downward trend, falling to its lowest level in nearly a decade. Consumers’ pessimistic outlook was fueled by growing fears about inflation, particularly rising petrol and food prices. Expectations have already fallen significantly below a rating of 80, implying poorer growth in the second half of 2022 and a greater chance of recession by the end of the year.
It is reasonable that investors are worried about the direction of the market, and a recession could have a greater impact on the Retail Industry. However, with its recent financial maneuvers and diversification of its business model, I believe Nordstrom is well positioned to deal with these forthcoming headwinds. Nordstrom’s revamped retail strategy may bring even more remarkable growth in the near future.
Competitor’s Comparisons
Finally, I am bullish on Nordstrom because of its competitive standing in the retail industry. Nordstrom is recovering nicely from the pandemic’s losses and performs quite well (33rd) in the Retail Sector. To illustrate this, I created the table below to compare Nordstrom’s financial performance to companies that income investors may consider as alternatives, such as Target (TGT), Dillard’s (DDS), and others.
As a result, Nordstrom surpasses all the firms listed on Yahoo Finance regarding shareholder return metrics (Dividend Yield and Return on Equity). Income investors should be drawn to this stock, especially because I see much more growth ahead. Financial indicators like these are likely to improve even more—higher dividend payouts, increased return on equity through share buybacks, and so on. Nordstrom, in my opinion, is well-positioned to become a retail sector leader in a relatively short period.
Conclusion
Nordstrom is brimming with bullish tailwinds. Their redesigned retail strategy, collaborations, and commitment to shareholder values with strong dividend recovery are all reasons to invest in this stock. My cautious Discounted Cash Flow model yielded an intrinsic price of $38.50, representing a market underpayment of 63.6%. While consumer fears about inflation rates are at an all-time high, I believe Nordstrom is well-positioned to overcome these headwinds within its industry and as a whole. For these reasons and more, I suggest you buy Nordstrom stock.
Featured Image: Megapixl @Jetcityimage
