Will Nordstrom's (JWN) Lackluster Run Continue in 2018?

Nordstrom, Inc. JWN, once an investors’ favorite, has been losing its sheen. Though the company’s growth strategy bodes well for the long term, higher expenses and a tough retail landscape have been hurting the company’s performance.

What’s Bothering the Stock?

Nordstrom has a robust growth strategy that is focused on enhancement of digital experience and supply chain. However, investments related to occupancy, technology, supply chain and marketing expenses are hurting the company’s margins. The company’s merchandise margin was hurt by higher occupancy expenses related to new Rack and Canada stores in the third quarter of fiscal 2017. This, in turn, led gross margins to contract 12 basis points (bps).

Also, higher investments resulted in 7.5% increase in SG&A expenses in the third quarter. Management now anticipates Retail gross profit to be impacted by higher new store occupancy expenses and mix impact of off-price growth in fiscal 2017. The higher end of earnings forecast was trimmed as well and is currently envisioned in the range of $2.85-$2.95 per share for fiscal 2017 versus $2.85-$3.00, projected earlier. Furthermore, the hurricanes that occurred in the third quarter are expected to hurt sales by $26 million, operating income by $17 million and earnings by 6 cents per share.

Additionally, a challenging retail landscape where consumers are shifting from offline to online has been denting Nordstrom’s performance.

Shares of this Zacks Rank #4 (Sell) company have lost 2.9% in a year, wider than the industry

’s decline of 1.2%. Also, the stock has underperformed the Zacks Retail-Wholesale sector’s growth of 26.3%. Further, a Growth Score of F raises concerns for the stock.

Will Nordstrom’s Growth Strategy Spark a Turnaround?

We expect Nordstrom, which shares space with The Buckle, Inc. BKE, has potential for a turnaround backed by its long-term growth strategy. The company plans to strike a balance between its sales and expense growth. Also, it is making amendments to operating model in response to the constant slowdown in mall traffic owing to customers’ shift to online shopping. Meanwhile, Nordstrom remains focused on advancing in the technology space by boosting e-commerce and digital networks, and improving its supply-chain channels and marketing efforts.

Bottom Line

Well, these initiatives are yet to reap results. Nonetheless, we hope that these endeavors might prove to be helpful in pulling Nordstrom back on the growth trajectory in 2018. However, for the time being you can focus on two retail stocks mentioned below that have outpaced the industry and gained over 20% in a year.

American Eagle Outfitters, Inc. AEO and Urban Outfitters, Inc. URBN have gained 22.8% and 22.1% in a year, respectively, as against the industry’s decline of 1.2%. Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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