Nordstrom: 3 Reasons the Pre-Earnings Dip Is an Opportunity

Key Points

• Nordstrom's last three earnings reports have been greeted by uptrends and the company has an overall much healthier operating model these days.
• At the midpoint of this year’s guidance, Nordstrom is trading at less than 10x earnings and its dividend yield has climbed back to 4%.
• If management delivers a strong Q2 report and/or raises guidance, a fourth straight post-earnings uptrend could be accelerated by a short squeeze.

Like its summer merchandise, shares of Nordstrom, Inc. NYSE: JWN are on sale.

After bouncing nicely off a two-and-a-half-year low, Nordstrom has fallen nearly 20% this month. And with the recovering department store operator reporting second-quarter results after the close on August 24th, this is shaping up to be an ideal ‘buy the dip’ opportunity.

In what will be a busy week for department store earnings, investors will learn the extent to which cooling inflation impacted consumer spending on clothes and other discretionary items. Naturally, Macy’s will get the parade started on Monday, followed by Kohl’s on Wednesday. Both are expected to report year-over-year sales declines (again).

So too is Nordstom — but its release could be better received by the market. The company is coming off a much better-than-expected first quarter update that propelled its shares into the low $20’s, a level not seen since February. With Wall Street braced for a net loss, Nordstrom delivered a surprise profit as strong inventory management offset weaker store and digital sales. 

Most of those post-earnings gains have been eaten away, however, with August’s broad market downturn sparing few stocks. Back under $20, the recovering retailer is back on the bargain rack at just the right time.   

For starters, the company’s last three earnings reports have been greeted by uptrends. Here are three more reasons to put Nordstrom’s in the shopping cart this week.

#1 - Fundamentals Are on the Upswing

The stock has declined, but there’s nothing to suggest Nordstrom’s fundamentals have deteriorated. Profit margins expanded in Q1 as supply chain optimization initiatives took hold and freight costs decreased. Inventories have returned to more normal levels. And in contrast to last year when markdowns and promotions were called upon to reduce inventory, merchandise is selling at full price again. Overall, this is a much healthier operating model.

Management conceded that macroeconomic pressures will continue to hurt near-term sales but declining costs should lead to better profitability on the other side of the hill. Nordstrom can afford to be more upbeat than peers because its customers can still afford its stuff. 

The company’s target market is 30- or 40-somethings that make over $100,000 a year. Price increases and higher credit card rates have been less of an issue for upscale department stores like Nordstrom. For less affluent shoppers, discounted apparel, accessories and home goods make the nearly 250 Nordstrom Rack stores an affordable alternative — and a unique asset that expands the company’s market size. 

#2 - The Dividend Is Worth ‘Checking Out’

As Nordstrom’s stock has dipped back below $20, its dividend yield has climbed back to 4%. At 7%, Kohl’s offers a much higher yield, but the dividend is less stable. Nearly 70% of Kohl’s projected earnings will be distributed as dividends compared to less than 40% for Nordstrom. This makes Nordstrom’s cash payments more sustainable, less risky and more likely to grow.

At the midpoint of this year’s guidance, Nordstrom is trading at less than 10x earnings. The stock deserves to trade at a premium to more economically sensitive department stores like Kohl’s, which trades at more than 11x. It won’t be long before the market discovers this discrepancy. Thursday’s Q2 report could mark the start.

#3 - Technical Oversold Conditions Have Set In

Despite the improving fundamentals and low valuation, Nordstrom has yet to regain favor with Wall Street. The stock continues to get hold and sell ratings, which could be a reflection of macro weakness and rising expectations of further Fed rate hikes. But bearish analyst sentiment may be a good thing.

That’s because Nordstrom is one of the most popular targets of short sellers. With almost 17% of the float held short, it is one of the most heavily shorted U.S. mid caps. If management delivers a strong Q2 report and/or raises guidance, a fourth straight post-earnings uptrend could be accelerated by short covering, a.k.a. a short squeeze. 

Squeeze potential aside, Nordstrom is oversold based on several technical measures. An 11 relative strength indicator (RSI) reading on the daily chart is abnormally low — especially with Kohl’s and Macy’s flashing 46 and 19 RSIs respectively. For a company on the upswing, Nordstrom’s RSI is bound to do the same. 

Last month’s emergence of a ‘golden cross’ of key moving averages also points to a prevailing uptrend. The low trading volume associated with the decline since the classic pattern formed suggests the longer term move is up. 

Bottom line: given the resilient nature of its shoppers, Nordstrom at less than an Andrew Jackson bill per share is one of the best deals in retail.