In the last year and a half, Nordstrom (JWN) retail business has stopped growing, as the company’s revenues began to decline on a Y/Y basis, while its online offering wasn’t able to drive substantial growth. While the pandemic helped the company to focus more on its eCommerce business and improve sales there, the rest of the business will continue to struggle and disappoint the company’s investors in the following months. As $500 million is about to mature in a year, there’s a risk that Nordstrom will dilute its shareholders or increase its debt burden even more in the foreseeable future to meet its obligations since its business is unlikely going to generate positive returns in the current environment. For that reason, we believe that the upside in Nordstrom is limited and we have no position in the company.

Value Destruction to Continue

Nordstrom has been suffering to drive growth even before the pandemic, as its big-box department model no longer was able to successfully compete against the rise of luxury online stores. As a result, the company’s gross margins started to slowly deteriorate and its stock lost more than 60% of its value in recent years. In addition, COVID-19 has fully disrupted a company’s business, as its stores were closed for a considerable time, and it will take a long time before Nordstrom will be able to return to its 2019 profitability levels.

Chart: Seeking Alpha

In its latest earnings report for Q2, Nordstrom said that its revenues declined by 51.9% Y/Y to $1.86 billion, while its non-GAAP EPS was -$1.54. In addition, its EBITDA loss during the period was $195 million, which is a decline of $571 million from a year ago. The company’s gross margin also declined and was only 20.9%, against the forecast of 26.1%, and down from 34.5% from a year ago. The growth of Nordstrom’s online business was the only positive thing in the report, but it was not enough to offset the losses of the retail side of the business.

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Right now, Nordstrom’s biggest problem is its leveraged balance sheet. While at the end of Q2, the company had $1.3 billion in liquidity, its long-term debt currently stands at $3.27 billion. What’s even worse is that it’s unlikely that Nordstrom will be able to make a substantial profit in the following months due to the pandemic and its high reliability on the retail side of the business, which was already struggling for a while. Also, considering that $500 million of the company’s debt matures in October 2021, it’s very likely that Nordstrom will execute another debt offering in order to boost its liquidity position after that debt is repaid. The problem is that due to its junk credit rating the company will be able to attract the interest of debt holders only at high rates, as it was able to price $600 million worth of convertible notes in April only above 8%. In addition, if we add into the picture the fact that the company’s margins are below its peers, while its EV/EBITDA ratio of over 30x is above the industry’s median EV/EBITDA ratio of less than 9.52x, it’s safe to say that Nordstrom is not a good investment right now.

Source: Capital IQ

While the anniversary sale will help the company to boost its revenues in Q3 and show better results on a quarterly basis, the fundamental problems will nevertheless remain. Due to its mall-centered model, which requires the company to pay high rents for premium locations, Nordstrom will not be able to drastically reduce its expenses. In addition, the ongoing pandemic will continue to keep the foot traffic at distressed levels. The recent bankruptcies of Neiman Marcus and Brooks Brothers show that the retail-oriented business model is unable to thrive in the current environment and successfully compete with luxury digital stores.

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The good thing is that in recent years Nordstrom has been focusing on the expansion of its off-price side of the business through Nordstrom Rack, which already generates more than 30% of the overall revenues. The biggest advantage of Nordstrom Rack is that it requires fewer expenditures to run a business and it’s able to improve the inventory turnover of the company. However, it’s still not enough to offset the losses of the core business and as long as the pandemic and the recession are not over, it will be hard for Nordstrom to thrive.

One of the things that the management might do to unlock value is to reduce its footprint by selling some portion of its assets, which will boost the company’s overall liquidity and reduce expenses. However, the Nordstrom founding family was unwilling to take the company private in recent years, so there’s no guarantee that they will agree to sell assets even at this time.

Overall, it’s safe to say that too many uncertainties are associated with Nordstrom’s stock and it’s unlikely that the business will be able to drastically improve its performance in the following months. One thing that’s certain is that the company’s shareholders should forget about receiving any dividends, as the company at this stage is unprofitable and its bottom-line performance will lag. For that reason, we decided to avoid Nordstrom and look for other, more attractive investment opportunities on the market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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