Time to Ring the Register on Nordstrom (NYSE: JWN) Stock into the Holiday Strength

Shares of department store retailer Nordstrom NYSE: JWN have more than doubled since being highlighted in our October 2, 2020, MarketBeat Original article “Nordstrom NYSE: JWN Stock Becoming a Bargain Basement Buy”. It’s time to ring the register to trim profits as shares are no longer a bargain, but more than fully priced. While certain fundamentals have improved due to management’s agility in the migration to digital, the lagging traffic with its mall-based locations is an underlying problem that will resurface after the holiday season. Despite the distribution of COVID-19 vaccines being underway, the structural inefficiencies ensure continued declining traffic as experienced pre-COVID. Prudent investors might consider using the seasonal rise in retailers to ring the register and lock in profits at opportunistic sell levels before reality sets in.  

Q3 FY 2020 Earnings Release

On Nov. 24, 2020, Nordstrom released its third-quarter fiscal 2020 results for the quarter ending October 2020. TheCompany reported non-GAAP earnings-per-share (EPS) profit of $0.34 excluding non-recurring items versus consensus analyst estimates for a loss of (-$0.10), beating estimates by $0.44. EPS includes a $0.12 tax benefit from the CARES Act bringing the real EPS to $0.22.  Revenues fell (-15.98%) year-over-year (YoY) to $3.09 billion falling short of the  $3.12 billion consensus analyst estimates. Top performing categories included activewear, home goods, beauty and designer items. Full priced item business dropped (-7%) YoY and further dropped in the mid-twenties percent range when excluding the Anniversary Sale. Nordstrom Rack off-price business sales fell (-32%) YoY. Digital sales grew to $1.6 billion representing 54% of total sales and increased 37% YoY. Excluding Anniversary sales, digital sales actually rose mid-teens. The Company expects sales to normalize by (-20%) after the momentum from the Anniversary Sale cools off in Q4.

Conference Call Takeaways

Nordstrom CEO, Erik Nordstrom, expounded on the execution of digital strategy in the pandemic era, “By linking our digital and physical asset at the market level, we’re able to offer customers up to 7 times more merchandise selection with two-day delivery or next-day order pickup. We have now reached scale in 10 of our top markets, which account for more than half our sales.”  The Company realized $550 in cash savings net of COVID-19 related charges. The Company expects to push that up to $750 million in savings by years-end.

Retail and Discount Convergence

Nordstrom has proven that luxury high-end and discounted products can co-exist in the same ecosystem. The migration to discounting high-end merchandise stoked fears of cannibalism between its discounted Nordstrom Rack stores versus its flagship high-end retail department stores, but the Company has shown they can actually be complementary while expanding the brand each to a larger demographic. “The Rack serves as an important pipeline to our Nordstrom Full-Price business, bringing in 7 million new customers in 2019. Additionally, more than one-third of our Rack customers cross-shop to Nordstrom, which lead to higher overall customer spend.”, stated CEO Nordstrom. He goes on to say, “More than 80% of our top 200 brands in Nordstrom are also carried at the Rack.” It seems this is backwards as discount price shoppers have a hard time paying full price for items. This is why Nordstrom Rack sales still fell (-32%) YoY in Q3.

One-Time Anniversary Sale Bump

It’s worth noting the bump in revenues and EPS was due to the Anniversary Sale. This is a one-time event and not a sign of a true uptrend in business. When backing out the Anniversary Sale figures, sales trends were down by nearly half of what was reported. The $0.12 EPS additional one-time tax benefit was also baked into the numbers. Keep in mind the EPS tax benefit includes the carryback of 2020 U.S. federal operating loss to recover previously paid taxes at the 35% rate rather than the 21%, deferment of employer portion payment of Social Security taxes, which the Company will have to pay in future quarters. Excluding Anniversary sales, net sales decreased in the mid-twenty percent range. This doesn’t bode well moving forward and the lack of forward guidance leaves investors on their own. Additionally, the bump from the Anniversary Sale may also have diluted upcoming Holiday sales since it was moved ahead into the third-quarter instead of the second-quarter. Keep in mind for the first nine-months of 2020, Nordstrom lost (-4.60) EPS compared to a profit of $1.96 EPS YoY. There’s no way to sugarcoat these numbers. For these reasons, it might be time for investors to consider ringing the register and locking in some profits at opportunistic sell price levels while the market still has holiday seasonal froth.

 JWN Opportunistic Exit 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 is attempting to reverse the downtrend as the monthly stochastic tries to cross up through the 20-band. The weekly rifle chart triggered a powerful stochastic mini pup in November, surging shares on a massive short-squeeze above the weekly market structure low (MSL)  above $22.08 and forming a monthly MSL above $29.54. Incidentally, that price overlaps with the weekly market structure high (MSH) trigger below $29.74. Prudent investors may look to cash in some profits into opportunistic exit price levels ranging from the $32.47 to the $29.54 Fibonacci (fib) level, with a profit stop under the $26.86 fib. It’s prudent to ring the register on the way up which in a position of strength, rather than chase the selling during weakness.