Nordstrom Stock: Generate Attractive Operating Cash Flow (NYSE: JWN)

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As my followers know, I am optimistic about the return of commercial real estate, including shopping malls, and my primary exposure in the space is through Simon Property Group (SPG). However, this article is about one of Simon’s major anchor tenants, Nordstrom (JWN). That said, Nordstrom isn’t just located in traditional malls. For example, the Nordstrom Rack banner can be found in strip malls, Main Street, malls as well as several urban/downtown locations including NYC Manhattan (e.g. Nordstrom Rack Union Square and Nordstrom Rack 31st & 6th).

I’m sure most readers are familiar with the Nordstrom brand, especially those based in the US. For those unaware, Nordstrom is a luxury department store chain founded in 1901, with over 350 stores (under the Nordstrom Nordstrom, Rack, and Nordstrom Local banners). Additionally, the company has a strong digital presence through Nordstrom and Rack apps and websites. The Nordstrom family still retains control of the company and actually tried to take it private in 2018, but the $50-per-share buyout offer was rejected by the board, calling it too low.

At the time of writing, Nordstrom is trading well below pre-pandemic levels, far underperforming its mall-focused department store peers. The following chart says it all.

Nordstrom vs peers: % price change
Data by YCharts

To be fair, Dillard’s (DDS) and Macy’s (M) managed to generate sales above pre-pandemic levels, but Nordstrom is almost there (more on that below). Additionally, Dillard’s outperformance was greatly exacerbated by the hype surrounding meme stocks, given that it is a meme stock itself. Plus, there are other indications that department stores are in much better shape than feared. For example, Kohl’s (KSS) is presenting takeover bids from suitors, and JC Penney, now co-owned by Simon and Brookfield Asset Management (BAM), is showing signs of strength. As Simon CEO David Simon mentioned in his opening remarks during SPG’s third quarter 2021 earnings call:

The JCPenney team stabilized the business with better financial results. And we added private and exclusive national brands. Our liquidity position is $1.5 billion and there is no outstanding balance on their line of credit.

Responding to a question from an analyst, Simon added:

we don’t sell because Penney works great

Coming back to Nordstrom, the main criticism is that company-wide sales have not reached pre-pandemic levels. Specifically, even though Nordstrom banner sales topped 2019 levels (3% increase), Nordstrom Rack is still struggling (8% decrease). Overall, for the third quarter of 2021, net sales decreased by 1% compared to the same period of fiscal 2019.

Even though net sales are flirting with pre-pandemic levels, with digital sales now accounting for nearly 50% of the company’s sales, the stock price is down more than 50%! It is important to note the following:

  • Nordstrom Rack sales are lagging due to low inventory levels, which will improve as the company navigates its way through well-known supply chain issues. It is only a matter of time before the company manages to optimize inventory levels.
  • Geographically, same-store sales for the Nordstrom banner in southern regions (including Southern California) increased 8% from 2019 and outperformed northern regions. It’s only a matter of time before the northern regions catch up.
  • Comparable sales in suburban stores continued to be stronger than in urban stores. As the world reopens and tourism returns to pre-pandemic levels, urban shopping will naturally resume. Tourism trends are already on the rise and it’s only a matter of time before normality is restored.
  • Nordstrom is more upscale than Macy’s and Dillard’s, and there is a lagged effect in terms of spending habits. As traffic in central business districts and offices reaches pre-pandemic levels, it will be another tailwind for Nordstrom (more people buying shirts, suits, etc.). Again, it’s a question of time.

All other things being constant, things are likely to improve at Nordstrom. It’s more a question of if, not when. Besides the aforementioned green shoots, what gave me the confidence to invest in Nordstrom was its strong cash flow generation capabilities. Below is a graph of Nordstrom’s operating cash flow since 2012.

JWN

JWN Operating Cash

Looking for Alpha

As you can see, annual cash from operations has consistently exceeded the $1 billion mark, every year since 2012 except last year (the year the pandemic hit and stores were forced to close their doors due to nationwide shutdowns). The good news is that JWN is back in positive operating cash flow territory and is poised to return to pre-pandemic levels. As a result, the company continues to strengthen its financial position and, as reiterated in the Q3 2021 earnings release:

the Company remains on track to reduce its leverage ratio to approximately three times and be able to return cash to shareholders by the end of 2021

In other words, the worst is clearly behind us and the company is actively working to return cash to shareholders in the form of dividends and buyouts. It’s fair to say that we are close to the inflection point, but the stock price is down more than 50% from pre-pandemic levels. To put it into perspective, JWN’s market is under $3.5 billion, cash flow from operations is expected to exceed $1 billion per year, and debt is manageable. In other words, if someone privatizes the company at current levels, they’ll get their money back in about 3 years, potentially even less if operating cash flow increases and exceeds $1.4 billion, like this was the case in 2016, 2017 and 2018. , there are other value enhancement initiatives to consider, for example Nordstrom reportedly hiring AlixPartners to review a possible Rack spinoff, or even the Nordstrom family once attempting to over privatizing the company. In any case, the decline is limited since the worst is behind us, while the rise remains enormous. The odds are in favor of making money at current levels and the fact that Nordstrom is back to generating significant positive operating cash flow provides a buffer until value is unlocked via an offering. buyouts, financial engineering (share buybacks), or simply stock price appreciation (multiple expansion).

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