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Analyst Report: NordStorm
About the company and overview
Founded in the year 1901, Nordstorm is a fashion retailer and one of the top rated operators in the departmental store industry. The company has successfully enhanced its brand equity by developing differentiated curated products, increasing storing count and targeting niche customer base. Most recently, the company is in news for investing in omni-channel capabilities as part of which, a heavy expenditure is made on store improvement, expansion and improvement of IT infrastructure.
Competitive Advantage
a) Investment in technology
Nordstrom thrives of providing fabulous shopping experience to its customers and this has remained a critical objective of the company’s mission. As part of this, the company hires best and capable people to serve the customers, and take significant assistance from the technology to enhance its customer’s experience. Important to note, to empower its customers, the company started investing in technological resources in 1994, and the first step was the launch of online shopping platform through Nordstorm.com and a perpetual inventory system that allowed the company to offer a multi-channel experience by 2002.
Therafter, during 2004 and 2014, the company made an additional investment in technology for enhancing its customer experience and also to empower its employees. The first development came in the form of a point-of sale system that included a personal book software for the sales personnel that could help them in tracking customer requests and queries. This was quickly followed by the launch of Nordstrom app, that allowed the customer to shop through their smartphones and also included support for sales people texting. Additionally, the company had also integrated Nordstrom.com and the Nordstrom app with the inventory management system, which also enhanced the customer shopping experience.
Even today the company continues to invest in technology and largely relies on social media resources such as Pinterest, through which, it is able to learn more about its customer’s preferences. Therefore, Nordstorm is carrying a balanced approach by giving due weightage to customer empowerment and employee development through significant and consistent investment in technology resources, which indeed is turning out to be a competitive advantage for the company.
Emphasizing Omni-channel
Nordstorm has spent more than a billion dollar on building omnichannel and is now rated as one of the top omnichannel retailer of the world. Important to note, while the outlet business helps the company to create a value amongst the customers focused on brand and not the cost, the omni-channel strategy has helped the company to resonate its brand amongst the youngsters.
Stock Valuation
Citing optimistic outlook for the company by the analyst community and some of the aspects related to the competitive advantage for the company, I was really interested in valuing the stock using DCF approach. As part of this approach, we meticulously applied the valuation inputs working separately on depreciation schedule and working capital schedule.
WACC estimation
WACC serves as the appropriate discounting factor for the forecasted cash flows of the company. In other words, it is the minimum rate, which the investors will accept to channelize their investment in the company. In order to proceed with our DCF model and fair value estimation, the first step was the estimation of the WACC rate. Even though the WACC and its inputs are available in the excel sheet encloses, however, we have also highlighted them comprehensively hereunder:
WACC= Weight of Debt* Cost of Debt(1-tax rate)+ Weight of equity* Cost of equity
= 5.02%
Calculative Notes:
Market value of debt= $5200 million
Cost of Debt= 6.50%
Market value of equity: Shares outstanding* Current Price
= 194*52.04
= $10095.76 million
Cost of equity: Risk free rate+ beta(equity risk premium)
= 1.50+ 0.6775(6)
= 5.565%
Fair Value Estimation
Post calculating the operating cash flow for the company for the projected 5 years,and discounting the same using the WACC rate of 5.02%, we found that the intrinsic value of the stock is $45.30, i.e. 15.30% below than the current stock price of the company.
Conclusion
Even though the departmental store industry is poised for 4% annual growth, and with Nordstorm being one of the major player of this industry, we do expect the company to witness sustainable increase in the revenue figures. However, for some years, the heavy expenditure on store count and the expansion will cut into the company’s profit, and this will affect the stock price.
References
Lange, Andrew. "Analyst Report: Xerox." Equity Research. 2016.
Lutz, Ashley. Nordstrom's Simple Strategy For Beating Everyone Else In Retail. 9 October 2014. 27 April 2016 <http://www.businessinsider.in/Nordstroms-Simple-Strategy-For-Beating-Everyone-Else-In-Retail/articleshow/44726274.cms>.
Sebastian, Jeanne W. RossCynthia M. BeathIna. Why Nordstrom’s Digital Strategy Works (and Yours Probably Doesn’t). 14 January 2014. 27 April 2016 <https://hbr.org/2015/01/why-nordstroms-digital-strategy-works-and-yours-probably-doesnt>.
Weishaar, Bridget. "Narrow-moat Nordstrom is facing near-term headwinds but is focused on expense reduction." Equity Research. 2016.
