Friday, August 12, 2011

Nordstrom Is Your One--Stop Shop For Riding the Wealthy's Coattails

Income inequality is as high as it was during the roaring 20s. So while the average person is making less than a decade ago, the top 1% is on a spending spree. But if you have some extra cash, buying shares of Nordstrom (NYSE: JWN) could be a way to go along for the ride.

During a quarter when U.S. GDP, 70% of which is accounted for by consumer spending, grew 1.3%, Nordstrom's profits popped 20% to $175 million and its sales were up over nine times faster than the general economy at 12.4% to $2.72 billion. Nordstrom's adjusted earnings of 80 cents a share were six cents higher than Wall Street expectations and its sales were $100 million above forecasts.

What's more, Nordstrom raised the top end of its company raised the upper end of its full-year guidance. Specifically, Nordstrom raised that range by 5% from 2011 earnings of between $2.80 and $2.95 and to between $2.95 and $3.10 per share.

But it's unlikely that most Americans are boosting their buying at Norstrom. After all 64% of them don't have enough cash on hand to cover a $1,000 emergency and 90% of Americans have suffered a decline in wages while the top 0.1% control $46 trillion worth of wealth.

And those top-income earners are the ones that are feeling it's alright to spend more at Nordstrom. The question for investors is whether this rapid boost in spending is sufficient to drive Nordstrom shares higher.

Here are four reasons to consider buying Nordstrom shares:
  • Reasonable valuation. Nordstrom's price to earnings to growth of 0.90 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 14.7 and is expected to grow 16.4% to $3.51 in its fiscal 2013.
  • Decent dividend. Nordstrom has a 2.17% dividend yield -- not bad compared to what you'd get in a bank account.
  • Expectations-beating earnings reports. Nordstrom has met or beaten analysts’ expectations in all of the last five reporting periods.
  • Out-earning its cost of capital. Nordstrom is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Nordstrom’s EVA momentum was 1%, based on first six months' 2010 annualized revenue of $9.2 billion, and EVA that rose from negative $11 million annualizing the first six months of 2010 to $143 million annualizing the first six months of 2011, using an 11% weighted average cost of capital.
One reason to avoid this stock is its rising sales with declining profits and a weaker balance sheet. Nordstrom has been growing with declining margins. Its $9.7 billion in revenues have grown at an average rate of 2.8% over the last five years while its net income of $613 million has slipped at a 1.3% annual rate over that period -- yielding a modest 6% net profit margin. Its debt has grown three times faster than its cash. Specifically its debt has spiked at a 45.5% annual rate from $624 million (2007) to $2.8 billion (2011) while its cash has grown at a 15.9% annual rate from $831 million to $1.5 billion in those years.

Nordstrom stock is poised to keep going up as the trend of wealth concentration increases and those top earners feel less inhibited about splurging. If you're not a Nordstrom shopper, at least you can benefit from the 10% discount on its stock.


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