It was just last year when the Nordstrom family explored a deal to take their retailing company private for $50 per share in cash. The board of Nordstrom (JWN) rejected the offer as insufficient and bankers will unwilling to lend more capital to the family at attractive rates in order for them to raise their bid. With the stock now trading around $28 there are reports that suggest the family is looking at ways to up their stake, even if 100% ownership is not possible due to board obstruction.
It looks to me that JWN is a long-term survivor in the competitive market for apparel and accessories. Wall Street is shunning the stock due to its department store exposure, but the Rack business (a higher end version of TJ Maxx) is overlooked and should continue to grow.
The traditional weaknesses that have plagued larger format clothing-focused chains in the past, most notably high leverage and a bloated store base, are pretty much non-issues for JWN. The company’s capital structure is conservative (net leverage of ~1.5x EBITDA) and there are only about 120 Nordstrom full-line department stores in North America, compared with over 800 for JC Penney (JCP) and over 600 for Macy’s (M).
With such a small relative store base, JWN has been able to build locations only in very strong, upscale markets and has avoided geographic concentration. And since interest expense is minimal relative to store-level cash flow, the company can service debt easily and still invest for the future. The end result is a company that has built out a strong e-commerce business (30% of total sales) all while producing free cash flow year in and year out to fund a generous dividend (over 5% at the current share price) and impressive stock buybacks (share count has dropped from 220 million in 2009 to 156 million in 2019).
With the stock at nearly half the price the Nordstrom family offered last year, JWN shares are dirt cheap (4.5x my estimate of 2019 EBITDA) and pay a great yield of 5.2%. The dividend is also well-covered by cash flow. Unless you think the Rack business is set for declines, like many predict for their 120 full-line department stores, JWN is unlikely to see a material drop in sales and earnings. We can debate how fast they can grow in the future, but Wall Street is pricing the stock as if growth is impossible anyway.
And then there is the chance that the family makes a bid to increase their now 30% stake to 50% or more. I would guess a tender offer at $37 would get a lot of action, and investors could partially cash out at a 30% premium to the current price. Simply put, before we lump JWN in with M and JCP perhaps we should consider the entirety of their company, the large insider ownership, and the cash flow and balance sheet characteristics of a business with fewer than 400 stores open globally across both the namesake and Rack banners.
Full Disclosure: The author and/or his clients were long shares of JWN at the time of writing, though positions may change at any time.
SOURCE: Peridot Capitalist Blog Post Archive – Peridot Capital Management LLC – Read entire story here.