Morningstar's latest equity report rates Nordstrom (NYSE: JWN) as undervalued, with a current price of $24.62 and a fair value estimate of $38.50, suggesting significant upside potential. The report highlights Nordstrom's mixed performance in retail but acknowledges strides in profitability and efficiency, particularly in its Rack stores and digital platform investments. Despite challenges in full-price sales and international expansion, Nordstrom's recent initiatives point toward moderate growth potential. With a "Very High" uncertainty rating and no economic moat, the stock presents both risks and opportunities for investors.

Stock Valuation and Target

Morningstar's Fair Value Estimate: Morningstar values Nordstrom at $38.50 per share, representing a price-to-fair value (P/FVE) ratio of 0.64. This valuation implies a considerable upside of 56.4% from the current trading price of $24.62 as of November 26, 2024.
Current Metrics:

Market Cap: $4.04 billion
Economic Moat: None
Uncertainty Rating: Very High
Dividend Yield: 3.09%
Morningstar notes that while Nordstrom's financial metrics are improving, macroeconomic headwinds and competitive pressures keep the valuation attractive for long-term investors.

Performance Highlights

Third-Quarter Results: Nordstrom's Q3 earnings exceeded expectations, with a 5% sales increase compared to a flat estimate. - **Adjusted EBIT Margin:** 2.9% (ahead of Morningstar's 2.2% forecast). - **Adjusted EPS:** $0.33, beating estimates by $0.13.
Despite these positive results, the company maintained its cautious full-year guidance of $1.75-$2.05 in EPS and a 3.6%-4% operating margin. Holiday performance and the ongoing buyout speculation may significantly influence investor sentiment.

Key Growth Strategies

Nordstrom has embraced the following initiatives to counteract challenges in the evolving retail landscape:
Rack Store Expansion:

Opening 23 new Rack stores in 2024, expanding to 280 locations.
Rack accounted for 38% of total sales in Q3, with an 11% growth year-over-year.
E-Commerce Integration:

Online sales peaked at $6.1 billion in 2021, representing 43% of total sales.
Investments in inventory management, artificial intelligence, and a unified loyalty program are driving efficiencies.
Private Label Growth:

Aiming to increase private-label sales to 20% of total revenue from 10%.
These strategies aim to solidify Nordstrom’s market share amidst stiff competition from off-price retailers like TJX Companies and online giants like Amazon.

Challenges and Risks

While Nordstrom demonstrates progress, several obstacles hinder its recovery:
1. Decline in Full-Price Sales: Full-price stores have struggled, with inconsistent sales growth and closures in weaker markets.

2. Failed International Expansion: Nordstrom’s costly entry into Canada ended abruptly, signaling challenges in international competitiveness.

3. Intensifying Competition: Players like Macy’s, Ross Stores, and digital disruptors continue to pressure Nordstrom’s margins.

4. Uncertainty from Family Buyout Proposal: The Nordstrom family and El Puerto de Liverpool have proposed acquiring the company at $23 per share, a price Morningstar deems undervalued compared to its $38.50 fair value estimate.

Actionable Insights for Investors

Investors considering Nordstrom should weigh its growth potential against inherent risks: 1. **Valuation Appeal:** The stock’s current price offers a compelling entry point for value investors aiming to capitalize on a potential turnaround. 2. **Focus on Rack Stores:** The Rack segment shows resilience and may continue to grow as the company invests in off-price retail. 3. **Buyout Possibility:** Speculation around a family-led acquisition adds short-term uncertainty but may drive price movements.

Competitor Comparison

Nordstrom’s key competitors present varying investment dynamics:
Macy’s (M): Fair value estimate of $25, last close at $15.89; faces similar pressures in full-price retail.
Kohl’s (KSS): Fair value estimate of $48, last close at $15.22; significant discount but struggling operationally.
Ross Stores (ROST): Fair value estimate of $123, last close at $154.38; outperforms peers in off-price retail with a "Wide Moat."
Nordstrom’s focus on digital sales and off-price growth differentiates it from these competitors.

Investor Takeaway

Nordstrom’s stock presents an attractive opportunity for value-driven investors with a high-risk tolerance. While operational challenges persist, improving margins and expansion initiatives signal potential recovery. Morningstar’s fair value estimate suggests significant upside potential, though caution is warranted due to macroeconomic and industry-specific risks.