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Nordstrom (NYSE: JWN) Stock Becoming a Bargain Basement Buy

Friday, October 2, 2020 | Jea Yu
Nordstrom (NYSE: JWN) Stock Becoming a Bargain Basement Buy

Retail fashion department store operator Nordstrom, Inc. (NYSE: JWN) shares have been bleeding excessively in recent weeks firmly underperforming the benchmark  S&P 500 index (NYSEARCA: SPY). The stock has fallen beyond the pandemic lows made in March 2020 forming a new decade low. Retail apparel makers and distributors have had mixed market sentiment with brick-and-mortar stores feeling the most pain in recent weeks coming into the quarter-end. The short interest has grown to near 41% of the float as of  Sept. 15, 2020. Options traders have noticed the massive open interest on the Oct 16, 2020 expiration puts spanning the $10.50, $13 and $15.50 strike prices with over 70,000 contracts open interest. The lack of news triggering the selling in Nordstrom shares is causing continued panic which will resolve when transparency is revealed. In the meantime, risk-tolerant investors may consider pulling the trigger on opportunistic pullback levels at bargain-basement levels on risk-weighted shares.

Q2 FY 2020 Earnings Release

On Aug. 25, 2020, Nordstrom released its second-quarter fiscal 2020 results for the quarter ending July 2020. The Company reported an earnings-per-share (EPS) loss of (-$1.62) excluding non-recurring items versus consensus analyst estimates for a loss of (-$1.50) missing estimates by (-$0.12). Revenues were down (-54.1%) year-over-year (YoY) to $1.78 billion missing analyst estimates of $2.4 billion. A major part of the miss was the decision to move its Anniversary Sale event to Q3 from Q2 and partake in further inventory reduction. Digital sales increased 20% in Q2 but fell (-5%) for overall company sales. Gross profit as percentage of net sales shrank to 21%, down from 35% YoY due to planned market downs. Nordstrom did generate positive cash flow of over $185 million. The Company is ahead of schedule on the preplanned $500 million target in annual cash savings, excluding COVID-19 charges.

Q2 2020 Conference Call Takeaways

Nordstrom CEO, Eric Nordstrom, addressed investors on the conference call. He reiterated the strategy to thin out inventory even at the cost of leaving unmet demand on the table to streamline operations into Q3. They moved the Anniversary Sale to Q3 to address pent-up demand with new arrivals with limited-time savings. Nordstrom hinted that results are in-line with expectations heading into the final week nothing sequential improvements in full-price sales trends. The Off-Price traffic is consistent and steadily improving. The Company had more than 50% growth in new customers through its digital platforms. Pickup-orders grew to near 15% of Nordstrom.com sales including contactless curbside pickup. The Company ended the quarter with $1.3 billion in liquidity (including $1 billion in cash) and reduced overhead expenses by 20%.  Most of the $370 million including $23 million in COVID-related charges were applied to corporate asset impairments.

Anniversary Sale

Moving the Anniversary Sale from July to August gave loyal customers and new customers time to create wish lists through a digital catalog that the Company provided for the first time in its history. This resulted in nearly 20 million wish lists heading into the Anniversary Sale. This gave more transparency to customer needs which enabled real-time adjustments to accommodate high demand items. Also, moving the sale to when most of Nordstrom’s stores were reopened makes more sense as regions lifted stay-at-home mandates. This is an example of how the Company is evolving through digital innovation and analytics to refine inventory to meet customer demand.

Bear Trap?

The Q2 numbers were ugly any way you slice it for Nordstrom. Short sellers tripped over themselves adding to short positions after the earnings release causing short interest to balloon to 41% of the float by Sept. 15, 2020. However, upon deeper investigation, Nordstrom purposely took a hit in Q2 2020 to reduce inventory and costs to set the stage for a second-half recovery attempt. The Anniversary Sale is the largest event of the year and moving it to Q3 sets it up for a strong rebound after setting the bar very low on Q2 results. As for being a high-end retailer that is missing the fast fashion trend, keep in mind that only one-third of the stores are full-line high-end stores while the rest are discount luxury and clearance stores including mostly Nordstrom Rack, TrunkClub and Jeffrey’s Boutiques. The Company managed to trim 25% of inventory to “mitigate markdowns and bring in newness for customers.” Also keep in mind that 50% of the stores were closed in Q2. Stores have since been reopening with limited to full store hours. This is a second-half recovery story that prudent investors may want to track for opportunistic pullback entries.

Nordstrom (NYSE: JWN) Stock Becoming a Bargain Basement Buy

JWN Opportunistic Pullback 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 has a bearish mini inverse pup with a falling 5-period moving average (MA) resistance at $14.51 Fibonacci (fib) level. The weekly rifle chart had triggered a market structure low (MSL) buy above $21.94 but failed twice causing the weekly inverse pup breakdown and a stochastic mini inverse pup. It is worth noting that the weekly stochastic has three failed attempts to cross up with any follow through. This can set-up a wash-out on the next rejection attempt which can provide opportunistic pullback levels are at the $11.63 fib, $10.69 overlapping fib and $9.53 fib. The upside resistance targets would be the $14.05 fib, $15.29 fib and $16.37 gatekeeper fib.

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Nordstrom (JWN)1.6$12.45+1.1%N/A-4.28Hold$26.53
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6 Stocks Riding the Coattails of Nikola Motor

Since its initial public offering on June 4, shares of Nikola (NASDAQ: NKLA) have surged over 130%. NKLA stock has cooled down since then and is now trading at just over a 60% premium from its IPO price of $34 per share.

Nikola isn’t alone. The entire electric vehicle (EV) market is on a tear. In addition to the surge in Nikola stock, Tesla (NASDAQ: TSLA) stock is up over 93% and Nio (NYSE: NIO) stock has climbed nearly over 160% in the same time period. But while Tesla and Nio are actually producing cars, Nikola does not even have a plant built.

With all that said, the allure of Nikola is easy to see. The company is planning on building a fleet of hydrogen fuel cell trucks powered by hydrogen fueling stations from sea to shining sea. At least that’s the plan. But that plan is years away. The company won’t even have a fuel cell truck available until 2023 at the earliest.

And while the United States has 39 hydrogen fueling stations, it’s an expensive, complicated venture. But that’s been the problem with hydrogen for nearly two decades. And that has some investors wondering what the company’s chief executive officer (CEO) Trevor Milton is really selling.

Leaving aside the question of whether Nikola is riding the coattails of Tesla, Nikola is beginning to create some significant coattails of its own. And there’s a reason for this. While Nikola is planning to compete with Tesla in the electric car arena, it’s also covering a specific niche with a semi-truck that will run on a hydrogen fuel cell.

View the "6 Stocks Riding the Coattails of Nikola Motor".

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