Nordstrom Is Best-In-Class Department Store, But Morgan Stanley Downgrades Stock

• The share price of Nordstrom, Inc. JWN has declined 38.11 percent over the past one year, falling to a low of $48.49 on January 6.
• Morgan Stanley’s Kimberly C. Greenberger has downgraded the rating on the company from Equal-weight to Underweight, while lowering the price target from $61 to $45.
• Although Nordstrom remains a “best-in-class” department store, Greenberger expects secular headwinds to gradually erode margins and limit long term earnings growth.

Analyst Kimberly Greenberger explained that “JWN's standout service, competitive pricing, coveted product, and seamless multichannel shopping experience sets it apart from department store peers and should keep it relevant long-term.”

However, the channel shift to lower margin ecommerce sales has been impacting department store margins, and Nordstrom is not immune. Greenberger expects retail operating margins to continue to decline in 2016.

Following the 3Q miss, the company lowered its 4Q guidance, due to expectations of continued margin pressure and top line weakness.

According to the Morgan Stanley report, however, recent data indicates that there could be further downside risk to the 4Q guidance, including “(1) negative comp laterals from other high-end department stores; (2) a significant uptick in our Nov/Dec apparel discounting index; and (3) broader and deeper markdowns y/y in our December store checks.”

The EPS estimates for 4Q and 2017 have been lowered from $1.27 to $1.18 and from $4.00 to $3.64, respectively.