Nordstrom Trading at Higher Valuation than Department Store Peers

Nordstrom (JWN) was trading at a 12-month forward PE (price-to-earnings) ratio of 13.8x as of January 19, 2016. The company’s valuation dropped by 27.3% in 2015. Nordstrom’s adjusted earnings in the first three quarters of fiscal 2015 were impacted by its investments in growth initiatives, including the company’s expansion into Canada. Nordstrom’s current valuation is lower than its five-year average forward PE of 16.0x.

The company is currently trading at a lower valuation than the S&P 500 Consumer Discretionary Index, which has a forward PE of 16.5x, and the S&P 500, which has a forward PE of 15.2x.

Nordstrom is currently trading at a higher valuation than its department store peers Macy’s (M) and Kohl’s (KSS), mainly due to higher sales growth expectations. As of January 19, Macy’s and Kohl’s were trading at forward PEs of 10.4x and 10.3x, respectively. Analysts expect Nordstrom’s sales in fiscal 2015 ending January 30, 2016, to increase by 7%, while its adjusted EPS (earnings per share) is expected to decline by 8% due to growth investments.

Analysts expect Macy’s fiscal 2015 sales and adjusted EPS to decline by 4% and 13%, respectively. The fiscal 2015 sales and adjusted EPS of Kohl’s are both expected to increase by 1% in fiscal 2015. Nordstrom, Macy’s, and Kohl’s together account for 3.5% of the SPDR S&P Retail ETF (XRT) and 0.2% of the SPDR S&P 500 ETF (SPY).

As of January 19, off-price retailers The TJX Companies (TJX) and Ross Stores (ROST) were trading at forward PEs of 19.6x and 19.8x, respectively. The growth in adjusted EPS of The TJX Companies and Ross Stores was better than that seen by Nordstrom in the first three quarters of fiscal 2015. For the full fiscal year ending January 30, 2016, analysts expect the adjusted EPS of The TJX Companies and Ross Stores to grow by 4% and 13%, respectively.

These off-price retailers have several advantages over department stores, including low-cost structures, efficient inventory management, and strong supplier relationships. We’ll look at analysts’ price target for Nordstrom and their recommendations in the next part of this series.