Nordstrom Puts Fear Of Markdowns Into Retail Sector

Key Points

• Nordstrom cuts earnings guidance after weak holiday sales. 
• The stock is down 7% and may move down another 25%. 
• Other major retailers report in late February and could report similarly weak results. 

If Macy’s NYSE: M warning wasn’t enough to put the fear of markdowns into the retail sector Nordstrom NYSE: JWN should seal the deal. The company lowered its outlook for both revenue and earnings citing weaker-than-expected sales and the impact of inventory-clearing markdowns.

The good news is that revenue will still come in within the previously stated range; the bad news is that markdowns resulted in a $0.60 cut to the earnings outlook, and that is an optimistic figure. To hit this target, the company will have to hit the high end of its new range, and this comparison is versus the low end of the previous range.

If the company’s results are even weaker than they now expect, we could be talking about a 35% cut to the full-year outlook and no reason for investors to buy this stock. 

“The holiday season was highly promotional, and sales were softer than pre-pandemic levels. While we continue to see greater resilience in our higher income cohorts, it is clear that consumers are being more selective with their spending given the broader macro environment," CEO Erik Nordstrom said.

Nordstrom Makes Headway On Inventory 

There is good news in Nordstrom’s new guidance, but it isn’t enough to keep the stock moving higher in the near term. The company says its inventory-clearing actions worked, and it is expecting a double-digit YOY decline by the end of the year. That is an impressive figure given the high-double-digit increases that have been posted by retailers who’ve reported over the last month or so.

Nike NYSE: NKE, an apparel and shoe manufacturer working hard on its DTC channels, reported a sequential decline in inventory just last month. This is good news and shows signs of improvement, but inventory is up 44% YOY, which isn’t so good with consumer demand in decline. 

"Having a healthier inventory level and mix positions us well to react quickly to changing consumer demand," Chief Brand Officer Pete Nordstrom commented. “Given the uncertain environment, we remain focused on executing with flexibility and agility, including conservative buy plans and faster inventory turns.”

The analysts still hold onto Nordstrom stock, but the sentiment and price target are trending lower. The Marketbeat.com consensus estimate is a Hold, but it is now a weak Hold versus a stronger Hold earlier in the year, and the price target, the consensus price target, is still suggesting a 25% of upside.

Still, it, too, is trending lower, and the most recent targets suggest the stock is overvalued. JPMorgan Chase & Company NYSE: JPM is the first analyst commentary to register on Marketbeat’s analyst tracking page. It includes a price target reduction to $13, which suggests a 25% decline for the stock. 

Most Retail Earnings Come Out In Late February

The takeaway from this news is that the earnings outlook for the retail sector could trend lower over the next few weeks. The big players in the sector, like Walmart NYSE: WMT and Target NYSE: TGT, will report on 2/28 and 2/21, respectively, making that a very big week.

Others, like Tractor Supply Company NYSE: TSCO, will report sooner, but most retailers will report around the same time as the US 2 largest public retailers. Assuming the news is as gloomy as Macy’s and Nordstrom are forecasting, the entire complex will likely fall. Nordstrom is slated to report actual results on March 1st.

The Retail Sector NYSEARCA: XRT) has been leading the S&P 500 NYSEARCA: SPY since the pandemic bottom in 2020, but that may be about to change. Nordstrom, however, has been lagging behind both indices due in part to the dividend suspension that was only recently reinstated.

The dividend yield is attractive at 4.35%, but its health is now in question. This has the stock down more than 7% in premarket action and possibly heading lower. If the market can’t hold support at this level, a move down to $12 is likely. That’s another 25% decline in share prices.