LB LandBridge Company LLC

We maintain our Neutral recommendation on Nordstrom Inc. (JWN), a leading fashion specialty retailer in the United States, with a target price of $51 per share.

Our view is based on the company’s strong line up of globally recognized brands catering primarily to the upscale segment, enabling Nordstrom to generate high margin revenue. However, we remain on the sidelines due to the first-quarter earnings miss, intense competition and exposure to seasonal fluctuations. Nevertheless, the company’s performance in the most recent quarter reflected an upside from the year-ago quarter.

Driven by solid top-line performance, Nordstrom’s first-quarter 2012 earnings increased 7.7% to 70 cents per share from the prior-year quarter. Top-line grew 13.7% to $2,535 million, driven by robust performance of the company’s e-commerce business along with the customer loyalty program.

Moreover, the company maintained its fiscal 2012 earnings expectation at $3.30-$3.45 per share. The current Zacks Consensus Estimate for fiscal 2012 stands at $3.43, well within the company’s guidance range.

Further, Nordstrom’s flexible cost structure helps the company to mitigate the impact of sluggish sales trends on margins, while enabling it to quickly capitalize on the emerging opportunities when market conditions recover. The company’s operations are mainly based on a variable cost business model and about 40% to 45% of selling, general and administrative expenses are variable in nature. Consequently, we expect a steady improvement in the company’s profitability moving forward.

On the other hand, Nordstrom remains focused on expanding its store network to drive top-line growth. During fiscal 2011, the company added 18 new stores, which contributed significantly to 12.7% year-over-year growth in fiscal 2011 net sales. Moreover, Nordstrom will be continuing with its store expansion strategy in fiscal 2012 with a target of opening 16 new stores consisting of 1 full-line store and 15 Rack stores.

We believe that the upscale department store operator will continue to report healthy financial results in the near future. The company will continue to attract more shoppers with its different mediums of sales channel as well as offers.

Moreover, the recent acquisition of online private sale leader HauteLook Inc. will facilitate Nordstrom to further increase its direct business capabilities, implement an enterprise-wide inventory management system and sell directly to online customers while enhancing customer services, which in turn will boost its profitability.

However, the leading retailer with over 500 brands competes with well-established players such as The Gap Inc. (GPS), Limited Brands Inc. (LTD), Abercrombie & Fitch Co. (ANF) and Saks Inc. (SKS), on the basis of fashion, quality and service.

Additionally, the seasonal nature of Nordstrom’s business facilitates generating a majority of the company’s sales during the second and fourth quarters, characterized by the anniversary sale and holiday seasons. As a result, Nordstrom is exposed to significant risks provided the seasons fail to deliver expected operating performance.

Given the balanced risk-reward scenario, Nordstrom's shares currently maintain a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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