Nordstrom Earnings: Signs of Progress Despite Tough Economic Conditions; Shares Very Undervalued

Nordstrom’s second-quarter report beat expectations as its off-price sales fell less than expected. However, the firm did not change its full-year guidance of $1.80-$2.20 in adjusted EPS on a revenue decline of 4%-6% as the economic outlook is murky and sales trends in August appear to be slowing. Even so, we view Nordstrom’s shares as undervalued and do not expect to make any material revisions to our $40 fair value estimate. While recent results have been rocky, we classify Nordstrom as a narrow-moat retailer and do not believe its current valuation reflects its potential for margin improvement over the next two years to above 6% from about 4% (adjusted) at present.