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Author: TMFSchool Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 89  
Subject: Nordstrom pitch Date: 9/16/2008 5:17 PM
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Nordstrom (NYSE: JWN) 52-Week Range: $25-$52 (recent price: $32) Market Cap: $7 billion
P/E: 11.75 (18.9 5yr ave.) P/S: 0.80 P/FCF: 5.4 EPS: 2.79 ROE: 42.2% ROA: 12.5% ROI: 20% Cash Conversion Cycle: 94.8 Inventory Turnover: 5.3 Same Store Sales (12-mo. 07): 3.9% Gross Profit Margin: 37.4%

[I had a fancy-shmancy color chart comparing 5-year performance of Nordstrom, Saks and Dillard's. Use your imagination. : )]

Why now?:
"The Nordstrom Annual Sales Event." That scritching you hear is the sound of customers across the country marking the date in their calendars. Now investors have can experience the same shopper's high and snap up this premiere department store's stock at a 30%-plus markdown since the beginning of the year.

About the Company
You don't have to be in business school to know about Nordstrom's way with customers. The company created the gold standard for exceptional retail experience, and it continues to make good on its stellar reputation: The National Retail Federation's 2007 Customer Service Survey lists Nordstrom in the top 10 of crowd pleasers along with Amazon.com, L.L. Bean, Zappos.com and Overstock.com.

Don't let the company's bricks and mortar roots fool you: Nordstrom is hardly a dusty relic of retailing. It is handily keeping up with the new dot com kids on the block, setting the virtual bar higher with every customer experience improvement it makes. At Nordstrom.com you can get live help from a department-specific customer service rep -- a beauty consultant to answer questions about various skin-care lines or a designer specialist to help you find some slacks to match those cashmere socks. And in May the company launched its "Buy Online, Pick Up In-Store" program for internet shoppers, which allows you to click and pick up the goods at a Nordstrom store of your choice.

It's tempting to discount the whole high-falutin' "the customer comes first" angle, until you consider what it costs a company when it gets it all wrong: According to a recent Harvard Business Review study, U.S. companies lose half of their customers every five years, with two-thirds of them claiming that customer care was their reason for leaving. Wooing new customers to replace the pissed off ones ain't cheap, either. The study showed that it costs six to seven times more to gain a new customer than to keep an existing one. Pleasing the people really pays -- studies show that improving customer loyalty by 5% can increase profits by a whopping 25%.

Of course, customers aren't buying simply out of affinity for your sales staff and pleasant store ambience. It's all about the goods and the wherewithal to manage the merchandise efficiently and effectively. In this area Nordstrom has excelled, as well, with:

• Strong inventory control: The company's perpetual inventory system enables quick reactions to customer feedback from the sales floor, leaving less stale merchandise on the floor. Sales per square foot have increased to $402 in 2008 from $321 in 1991.
• Consistent turnover rate: The four-quarter average inventory turnover rate was consistent with last year at 5.09 for the second quarter of 2008 compared to 5.06 for the second quarter of 2007.
• The ability to anticipate pullbacks: To deal with the general downturn in retail the company aligned inventory levels with lower sales expectations by controlling receipts and editing merchandise to just the most compelling fashion. Total average inventory per square foot for the four quarters ended August 2, 2008, decreased 3.8% compared to the four quarters ended August 4, 2007.
• Operational agility: The company trimmed its fixed administrative expenses by 5% compared to last year’s second quarter, in part by lowering performance-related incentives.
• Channel to clear low-selling merchandise from the mother ship and elsewhere (at 30% to 70% savings). The company's Nordstrom Rack division (51 stores v. 106 full-line stores two Jeffrey boutiques and two Last Chance clearance stores) has been a standout during tough retail times. For example:

Same-store sales in Rack. v. Full-Line Retail (FLR)

2005 2006 2007 YTD
FLR 5.4% 5.9% 2.5% (9.4%)
Rack 14.8% 10.9% 8.7% 5%

[darnit, I forgot how to format tables in posts... anywhoo, you get the gist, hopefully]

The Financials:
Strong points:
• Strong gross margins (40%) and net margins (7.7%): better than Niemen Marcus (36%; 3.6%), Saks (38%; 1.6%), Dillard's (34%; .2%).
• High level of inside ownership: 25% owned by insiders.
• Very shareholder friendly: Consistently keeps low cash reserves (currently $350 million); has been buying back shares for past three years; pays a handsome 1.88% dividend; its five-year annual dividend growth rate is more than 23%.

Risks:
The economy (duh): The company is realistic about its near-term picture, expecting total company same-store sales to be negative 4.0% to negative 6.0% for both the third quarter and the full year.

The financially troubled customer: Though one could argue that it caters to a more financially stable audience and is not as susceptible to the fickle tastes of younger customers.

Exposure to debt defaulters: Nordstrom brought its credit card business in-house (with its co-branded VISA cards, a debit card and a private-label card). While it retains revenue from these banking operations it also exposes them to the messes and risks of that business.

Limited growth opportunities: All 161 stores are located in 28 states in the U.S.. The company says it plans to increase store count by 20% in the next five years as well as remodel nearly 30 of its existing locations.

Bottom Line:
Every bargain hunter knows that the best deals are had are in the off-season. (Many a perfect winter coat has been bought during the dog days of summertime.) Right now Nordstrom is the perfect black suit -- impeccably made; classically cut -- hanging on the clearance rack (and in your size, even!). It's the quality garment you'll keep in your wardrobe for years to come. Sure, there may be further markdowns, but even at this price you're scoring a real deal.

Foolishly,
Dayana
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