Nordstrom (JWN) reported solid Q3 2020 results. Nordstrom’s sales remain down significantly versus pre-pandemic levels, but it was able to generate over $100 million in positive EBIT during the quarter through higher-than-expected merchandise margins and SG&A reductions that nearly matched its sales decline.

Nordstrom believes that the majority of its cost reductions are permanent, setting it up well for when the pandemic ends. The news about effective vaccines points to new COVID-19 cases being greatly reduced in the US by mid-2021, which should translate into a strong second half of the year for Nordstrom.

Sales Performance

Nordstrom’s total sales decreased -15.8% in Q3 2020, although this was with an approximately +10% benefit from the Anniversary Sale event shift from Q2 2020 to Q3 2020.

Nordstrom’s full-price business saw its net sales decline by -6.6%, although without the benefit of the Anniversary Sale event shift, sales would have declined in the mid-twenties. Nordstrom’s off-price business saw a -32% decline in net sales.

The ongoing effects of the pandemic continued to shift Nordstrom’s sales online, although +37% digital sales growth was not enough to make up for the estimated -42% in-store sales decline compared to Q3 2019.

$ Billion Q3 2019 Q3 2020 % Chg
Total Net Sales $3,566 $3,002 -16%
Estimated Non-Digital Sales $2,371 $1,369 -42%
Estimated Digital Sales $1,195 $1,633 37%

Without the benefit of the Anniversary Sale event shift, Nordstrom indicated that digital sales would have been up in the mid-teens percent compared to Q3 2019. This would result in in-store sales being down by approximately -47% without the benefit of the Anniversary Sale event shift.

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Margins and Cost Controls

Nordstrom did very well in terms of controlling costs. Its gross profit declined from 34.3% in Q3 2019 to 32.8% in Q3 2020. This was pretty solid given the shift of the Anniversary Sale into Q3 and the -16% decline in sales volumes though. Nordstrom indicated that its merchandise margins exceeded its expectations.

As well, Nordstrom’s SG&A expenses ended up at 32.1% of net sales, compared to 31.8% of net sales in Q3 2019. Absolute SG&A expenses went down approximately -15%, which nearly cancelled out the effect of the -16% decline in net sales. Nordstrom mentioned that this was primarily from the permanent -20% reductions in overhead costs compared to 2019. This is something that will put Nordstrom in good shape once the pandemic abates.

Vaccine Progress

Nordstrom’s sales are expected to remain down significantly versus prior year in Q4 2020. It mentioned that it expects sales down in the low-20s percent in Q4 2020, which would be a modest improvement from Q3 2020 after accounting for the effect of the Anniversary Sale event shift.

Sales will likely remain depressed into 2021, but the excellent vaccine news bodes well for later in 2021. So far, there are at least three vaccines that show potentially 90+% effectiveness based on early results. If these results hold with more widespread distribution, new cases of COVID-19 may be greatly reduced by mid-2021 in the US. This would set up Nordstrom for a strong second half of 2021, with customers have no qualms about shopping in-store anymore, as well as the return to normal levels of socialization (stimulating related purchases).

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2022 Outlook and Valuation

Looking forward to 2022, I believe that Nordstrom may be able to get its net sales back to around -5% to -10% of 2019 levels. This is an estimate that assumes a roughly 55% to 80% recovery of lost sales (comparing 2H 2020 to 2H 2019).

With 34% gross margins (slightly lower than 2019 due to the accelerated shift to digital sales) and $4.375 billion to $4.45 billion in SG&A (compared to $4.808 billion in 2019), Nordstrom would be able to generate EBIT of $631 million to $812 million.

Low High
Net Sales $13,620 $14,375
Credit Revenues $375 $375
Cost Of Sales $8,989 $9,488
SG&A $4,375 $4,450
EBIT $631 $812

At the higher end of estimates, this would only be modestly lower than the $837 million EBIT that Nordstrom reported in 2019 and the $815 million to $855 million EBIT range that it initially guided to for 2020.

Based on its mid-2019 valuation multiples, this potential range of EBIT results suggests a value of $28 to $35 for Nordstrom’s shares. If Nordstrom can reach 2019 sales levels again while maintaining its reduced cost structure, it is possible that it could deliver close to $1 billion EBIT, potentially resulting in a valuation of over $40 per share.

The department store business remains tough, but the pandemic crisis has made Nordstrom quite efficient.

Conclusion

The promise of several effective vaccines being rolled out near the end of 2020 and early 2021 means that new COVID-19 cases should be greatly reduced by mid-2021, setting Nordstrom up for a rebound in sales starting in the second half of 2021.

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It is uncertain how much permanent damage has been done to Nordstrom due to the potential for altered shopping patterns, but I believe that getting to within 5% to 10% of 2019 sales appears reasonable for 2022.

Nordstrom’s improved cost efficiency means that it may be able to generate near pre-pandemic levels of EBIT with around 5% lower sales than before, so getting to that sales result could make it trade in the mid-$30s, which is what it averaged in 2019.

At its current price, I am modestly positive on Nordstrom, although there is still uncertainty about how much sales will rebound in the end.

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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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