Nordstrom (NYSE: JWN) Stock Becoming a Bargain Basement Buy

Retail fashion department store operator Nordstrom, Inc. (NYSE: JWN) shares have been bleeding excessively in recent weeks firmly underperforming the benchmark  S&P 500 index NYSEARCA: SPY. The stock has fallen beyond the pandemic lows made in March 2020 forming a new decade low. Retail apparel makers and distributors have had mixed market sentiment with brick-and-mortar stores feeling the most pain in recent weeks coming into the quarter-end. The short interest has grown to near 41% of the float as of  Sept. 15, 2020. Options traders have noticed the massive open interest on the Oct 16, 2020 expiration puts spanning the $10.50, $13 and $15.50 strike prices with over 70,000 contracts open interest. The lack of news triggering the selling in Nordstrom shares is causing continued panic which will resolve when transparency is revealed. In the meantime, risk-tolerant investors may consider pulling the trigger on opportunistic pullback levels at bargain-basement levels on risk-weighted shares.

Q2 FY 2020 Earnings Release

On Aug. 25, 2020, Nordstrom released its second-quarter fiscal 2020 results for the quarter ending July 2020. The Company reported an earnings-per-share (EPS) loss of (-$1.62) excluding non-recurring items versus consensus analyst estimates for a loss of (-$1.50) missing estimates by (-$0.12). Revenues were down (-54.1%) year-over-year (YoY) to $1.78 billion missing analyst estimates of $2.4 billion. A major part of the miss was the decision to move its Anniversary Sale event to Q3 from Q2 and partake in further inventory reduction. Digital sales increased 20% in Q2 but fell (-5%) for overall company sales. Gross profit as percentage of net sales shrank to 21%, down from 35% YoY due to planned market downs. Nordstrom did generate positive cash flow of over $185 million. The Company is ahead of schedule on the preplanned $500 million target in annual cash savings, excluding COVID-19 charges.

Q2 2020 Conference Call Takeaways

Nordstrom CEO, Eric Nordstrom, addressed investors on the conference call. He reiterated the strategy to thin out inventory even at the cost of leaving unmet demand on the table to streamline operations into Q3. They moved the Anniversary Sale to Q3 to address pent-up demand with new arrivals with limited-time savings. Nordstrom hinted that results are in-line with expectations heading into the final week nothing sequential improvements in full-price sales trends. The Off-Price traffic is consistent and steadily improving. The Company had more than 50% growth in new customers through its digital platforms. Pickup-orders grew to near 15% of Nordstrom.com sales including contactless curbside pickup. The Company ended the quarter with $1.3 billion in liquidity (including $1 billion in cash) and reduced overhead expenses by 20%.  Most of the $370 million including $23 million in COVID-related charges were applied to corporate asset impairments.

Anniversary Sale

Moving the Anniversary Sale from July to August gave loyal customers and new customers time to create wish lists through a digital catalog that the Company provided for the first time in its history. This resulted in nearly 20 million wish lists heading into the Anniversary Sale. This gave more transparency to customer needs which enabled real-time adjustments to accommodate high demand items. Also, moving the sale to when most of Nordstrom’s stores were reopened makes more sense as regions lifted stay-at-home mandates. This is an example of how the Company is evolving through digital innovation and analytics to refine inventory to meet customer demand.

Bear Trap?

The Q2 numbers were ugly any way you slice it for Nordstrom. Short sellers tripped over themselves adding to short positions after the earnings release causing short interest to balloon to 41% of the float by Sept. 15, 2020. However, upon deeper investigation, Nordstrom purposely took a hit in Q2 2020 to reduce inventory and costs to set the stage for a second-half recovery attempt. The Anniversary Sale is the largest event of the year and moving it to Q3 sets it up for a strong rebound after setting the bar very low on Q2 results. As for being a high-end retailer that is missing the fast fashion trend, keep in mind that only one-third of the stores are full-line high-end stores while the rest are discount luxury and clearance stores including mostly Nordstrom Rack, TrunkClub and Jeffrey’s Boutiques. The Company managed to trim 25% of inventory to “mitigate markdowns and bring in newness for customers.” Also keep in mind that 50% of the stores were closed in Q2. Stores have since been reopening with limited to full store hours. This is a second-half recovery story that prudent investors may want to track for opportunistic pullback entries.

JWN Opportunistic Pullback Levels

Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for JWN stock. The monthly rifle chart has a bearish mini inverse pup with a falling 5-period moving average (MA) resistance at $14.51 Fibonacci (fib) level. The weekly rifle chart had triggered a market structure low (MSL) buy above $21.94 but failed twice causing the weekly inverse pup breakdown and a stochastic mini inverse pup. It is worth noting that the weekly stochastic has three failed attempts to cross up with any follow through. This can set-up a wash-out on the next rejection attempt which can provide opportunistic pullback levels are at the $11.63 fib, $10.69 overlapping fib and $9.53 fib. The upside resistance targets would be the $14.05 fib, $15.29 fib and $16.37 gatekeeper fib.