I shorted Nordstrom (JWN) again this week after posting my momentum sort results on struggling Midcap S&P 400 picks. After mentioning the stock in a bearish article in early May, Nordstrom has continued to slide in price and underlying value.
Nordstrom operates large physical, mall-centered store locations that require high rent payments and overhead costs. When the company was forced to shutter retail stores from the U.S. coronavirus pandemic response, it’s sales and cash flow plummeted. And, with much greater logistical effort to close and restart sales than the typical department store or online retailer, this high-end clothing and fashion boutique has struggled throughout 2020.
Image Source: Company Website
To illustrate just how rotten business has been for Nordstrom, and the difficult investment headwinds for the stock, I have pictured some Seeking Alpha data points to consider below. The Quant, computer-driven score for the company is one of the worst in the SA database during 2020. The current 1.48 score is rated as Very Bearish. The company holds the last place position for underlying business strength in the Department Store group, and ranks 405 out of 441 in the Retail universe followed. It lands in the bottom 10% of all 3932 stocks sorted by SA. The SA Quant rating system includes the company’s financial results, the stock’s trading history, and sell-side analyst estimates of future revenue and earnings, among other data.
Nordstrom holds the distinction of being the biggest loser for investment performance in the national Department Store sector, outside of bankrupt J.C. Penney (OTCPK:JCPNQ). Below are 6-month to 3-year price charts of relative gains/losses investing $10,000 in Nordstrom vs. Kohl’s (KSS), Dillard’s (DDS), The Gap (GPS), Macy’s (M), TJX Companies (TJX) and the S&P Retail SPDR ETF (XRT).
Operations moving from bad to worse?
The company’s 10-K for last year reported a whopping $9.3 billion in contractual obligations in total (including debts, purchase obligations and operating leases), with a minimum of $2 billion due in 2020. In the end, the company barely owns as many identifiable real-world assets to offset the $9+ billion in liabilities. Believe it or not, Nordstrom now holds a negative -$2.9 billion (loss) in retained earnings over the life of the business!
Operating income has declined each year since 2015. At the beginning of August, after the worst of the coronavirus mess, Nordstrom’s Q2 held a negative tangible book value of -$75 million. Comparing this number to a tangible book value of $730 million in February, you can see the big dent in operations the recession has made on the company’s books.
Total debt has risen from $2.6 billion in fiscal 2019 to $5.8 billion currently. Both Moody’s and Standard & Poor’s have Nordstrom bonds at high-risk “B” credit ratings, with a negative outlook. The enterprise reported a sharply negative -$823 million in free cash flow the trailing 12 months and -$47 million in operating cash flow through early August. Sales were down -53% during the summer quarter vs. 2019. Digital online sales are now running at 60% of total transactions, as consumers buy from home.
The stock price is down a whopping -70% in calendar 2020. A value investor must think, it cannot go any lower! Yet, when you calculate enterprise value [EV] by adding the corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents found on the balance sheet, Nordstrom still looks expensive vs. peers and competitors. Below are charts of EV to asset and revenue calculations.
Cash flow to debt, and debt to assets also highlight the precarious financial condition Nordstrom must confront moving into 2021. Any new hiccups in operational execution or an unexpected double-dip recession would be incredibly problematic for the company at this stage.
Ugly Technical Trading Chart
Nordstrom reached a new 52-week low price this week, the opposite situation of the high-flying technology stocks outlining all-time high trades in August and early September. All told, Nordstrom owns one of the ugliest looking trading patterns I can find on Wall Street in late September.
Momentum indicators are all pointing down, sharply lower for most. Below is a 12-month daily price and volume chart, alongside several of my favorite indicators. The Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume creations are all incredibly bearish right now.
While the company is projected to be profitable again in 2021, the consensus Wall Street analyst forecast is based on an economic recovery and the elimination of the coronavirus problem by next summer. What if we get a double-dip recession into 2021, from a jump in virus spread during the fall/winter months and/or Washington fails to provide additional stimulus aid to a struggling economy before a new Congress is sworn into power during January?
My outlook: Nordstrom’s teetering balance sheet and cash flow situation will not mix well with another downturn in business operations. Further debt issuance, equity dilution, asset sales, even a bankruptcy or major reorganization are entirely possible outcomes at this juncture.
I am short a small Nordstrom position in a large, diversified long/short portfolio. I am projecting the current underperformance span vs. the overall U.S. stock market will continue into early 2021.
Investors should understand that shorting involves greater risk than a regular long approach to investing. You can lose more than you invest initially, if good news propels a stock higher unexpectedly. I suggest shorting a large number of individual stocks with your capital only as a hedge against your investments on the long side. Small short positions and a net-neutral to somewhat net-long portfolio design overall will keep bearish short-sale picks from ruining your day, when one or more invariably outperform the market.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Disclosure: I am/we are short JWN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.