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Nordstrom, Inc. Tanks After Earnings Miss, Analysts React

As Nordstrom stock took a steep nosedive this morning, analysts up and down Wall Street began slashing their price targets for the retail chain. The company greatly missed earnings estimates, and shares plummeted as a result, falling by as much as 16.97% to $52.70 per share during afternoon trading hours today.

Nordstrom, Inc. Tanks After Earnings Miss, Analysts React

Nordstrom earnings disappoint

Nordstrom posted adjusted earnings of 57 cents per share, greatly missing the consensus estimate of 73 cents per share. It also excludes a headwind of 15 cents per share from the sale of the credit business. Total revenues amounted to $3.33 billion, missing the consensus of $3.37 billion for the quarter.

Goldman Sachs analysts Stephen Grambling and his team said in that almost every line item contributed to the retailer’s miss as sales significantly decelerated. Nordstrom’s comparable store sales increased by 0.9%, compared to the second quarter’s increase of 4.9% and Goldman’s estimate of 4%. The retailer’s gross margin also plunged, falling 162 basis points compared to Grambling’s estimate of an increase of 1 basis point.

Traffic trends at Nordstrom take a dive

Traffic to Nordstrom’s stores also plunged starting in August and did not recover. Because of all the problems, management slashed their full year earnings per share estimate to a range of $3.40 to $3.50 per share. Their previous range was between $3.70 and $3.80 per share. They expect same store sales to increase by between 2.5% and 3%, which is another decline. Their previous projection was an increase of between 3.5% and 4.5% for the full year. Management said the pressure has continued going into the current quarter.

Grambling said he was especially surprised by the wide misses even though some of Nordstrom’s peers have reported challenging trends. He said the retailer is not as exposed to tourism and headwinds from weather changes as some of its competitors are.

More bad news from Nordstrom

On the earnings call, management highlighted that they saw broad-based weakness across the board with weak traffic being the main driver. Comparable store sales in all segments, all geographies, and most categories declined due to weak traffic.

Nordstrom began marking down items in every category in order to clear out inventory going into the holiday shopping season. Management explained that most of the compression in the retailer’s gross margin was due to those broad-based markdowns aimed at liquidating extra inventory and getting back on track. Grambling found it interesting that most of the marked-down items were sent to the Rack.

In spite of all the problems, Nordstrom management attempted to sound upbeat, saying that next year will mark an upward inflection for earnings per share growth. They said investments are waning and added that growth in sales and earnings should start narrowing gradually. Also the $900 million buyback they announced, which will begin in the fourth quarter, will equate to nearly 9% of Nordstrom’s market capitalization.

Goldman Sachs has a Neutral rating on Nordstrom.

Price target cuts for Nordstrom

Among the firms to cut its price target for Nordstrom was Credit Suisse. Analysts Michael Exstein and Anjani Vedula slashed their target from $75 to $60 per share. They maintained their Neutral rating on the retail chain.

They expect Nordstrom’s gross margins to remain pressured in the fourth quarter because some of the company’s competitors haven’t been “as preemptive with their markdowns.” They still think Nordstrom is “one of the best franchises in the retail sector,” but they remain Neutral-rated because the retailer isn’t “immune to the cyclical and secular challenges” facing the entire sector.

Deutsche Bank analyst Paul Trussell and his team also slashed their target for Nordstrom, pushing it down from $84 to $66 per share, although they maintained their Buy rating on the stock. They actually like the retailer and were happy with management for cutting inventory levels and focusing more on expense management. However, they admitted that “solving the sales equation seems elusive at this moment.”

Baird analyst Mark Altschwager also cut his target for Nordstrom from $75 to $60 per share and maintained his Neutral rating. He said he had been warming up to the stock because its valuation had become “more reasonable” and it’s expected that next year will bring an earnings inflection. However, he is now concerned about the lack of near term clarity.

Huge problems at Nordstrom?

One of the more bearish reports on Nordstrom came from Macquarie Research analysts Laurent Vasilescu and Stephanie Wakeham. They cut their price target for the retail chain almost in half from $82 to $45 per share and maintained their Neutral rating on the stock.

They noted that the story was similar with Macy’s but found it “troubling” that the average Nordstrom customer tends to be “in better footing than most.” They also said that the problems with Nordstrom go beyond weather or port situations and that there is a real problem here.

…But Stifel would buy Nordstrom

Interestingly, Stifel analyst Richard Jaffe and his team said they would actually buy Nordstrom on the weakness resulting from the weak earnings results. They also cut their price target on the stock, bringing it from $84 to $70 per share. They see the retailer as a “best-in-class” and see it as a long term holding. They expect Nordstrom to start seeing improvements over the next few years as its investments wide down.

They blame the mild weather for some of the problems, although they are also concerned that consumers may be shifting their behavior. They have noted a shift over the last several years with consumers spending more on big-ticket items like cars and homes rather than other items, and they believe Nordstrom’s third quarter results demonstrate the continuation of this trend.

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