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Why UBS Downgraded Nordstrom Stock

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Rating downgrade

Nordstrom (JWN) stock fell 1.7% on July 2 after UBS downgraded its rating for the upscale department store to a “neutral” from a “buy.” UBS lowered its price target significantly to $33 from $65. UBS has lowered its rating for Nordstrom because the department store chain’s competitive position is deteriorating, with more and more customers looking for value deals offered by discount retailers.

Prior to UBS, Goldman Sachs downgraded its rating for Nordstrom stock on June 27 to a “sell” from a “neutral,” giving it a price target of $30.

Nordstrom and its department store peers are under tremendous pressure, as online retailers such as Amazon (AMZN) and discount or off-price retailers such as TJX Companies (TJX) have intensified the competition in the retail space. Nordstrom has been enhancing its merchandise and strengthening its online business to attract customers and improve the shopping experience.

However, Nordstrom’s full-price stores are struggling to improve their sales. Perhaps customers are more attracted to the bargain deals offered by discount retailers than the expensive assortment available at Nordstrom’s full-price stores.

Bleak outlook

In May 2019, Nordstrom disappointed investors with its results for the first quarter of fiscal 2019, which ended on May 4. Nordstrom’s revenue (retail net sales plus credit card revenue) fell 3.3% to $3.44 billion, and its adjusted EPS fell 54.9% to $0.23. Both metrics lagged analysts’ expectation of revenue of $3.58 billion and EPS of $0.43. The company’s weak performance prompted it to lower its outlook for fiscal 2019.

Nordstrom expects net sales growth in the range of -2.0%–0.0% and EPS in the range of $3.25–$3.65 in fiscal 2019. The company expects the soft sales trend it experienced in the first quarter to continue in the second quarter. Analysts expect Nordstrom’s revenue to fall 1.0% to $15.7 billion in fiscal 2019. Nordstrom’s revenue rose 2.5% in fiscal 2018, marking its tenth consecutive year of higher revenue.

Analysts expect Nordstrom’s fiscal 2019 adjusted EPS to fall 8.0% to $3.32 due to its weak top line and increased expenses in support of its strategic initiatives.

YTD movement

Nordstrom stock was down 33.6% on a YTD (year-to-date) basis as of July 2. Stocks of peers Macy’s (M) and Kohl’s (KSS) were down 29.3% and 29.0%, respectively, YTD, while JCPenney (JCP) was up 6.7% as of July 2. On July 2, analysts’ average target price for Nordstrom stock was $36.31. This estimate reflects a potential upside of 17%.

After the rating downgrade by UBS, Nordstrom stock has “hold” ratings from 18 out of 23 analysts (or 78%). The stock carries a “buy” rating from two analysts, while three analysts call it a “sell.”

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