Nordstrom, Inc. (JWN): Buy if Suppport Holds

September 26, 2013, 08:07 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

At the high-end of the retail market, Nordstrom, Inc. (NYSE:JWN) operates 252 stores in 34 states, including 117 full-line stores, 132 Nordstrom Racks, two Jeffrey boutiques and a clearance store. Nordstrom posted solid second quarter results on August 15. Total revenue rose 6.3% year-over-year to $3.2 billion, while earnings per share jumped 24% YOY to $0.93, which was in line with consensus estimates.  Nordstrom is looking to expand by adding new stores, especially its high-end discount Rack stores. Is this the time to buy the stock?

Nordstrom’s latest store openings demonstrate the company’s commitment to strengthen its network and drive top-line growth.  Nordstrom plans to double the number of Rack stores by 2016, with 23 openings in 2013 and more than 30 in 2014. Currently, the company plans to open 10 more Rack stores during the remainder of 2013 in locations such as West Palm Beach, Brooklyn, NY, and Riverside County, CA.  The Rack is part of a larger growth story for the company with growth coming from online, full-line stores, and the Rack. The Rack is a strong contributor to the total Nordstrom sales and Rack stores are very productive in terms of sales per square foot. Last year, the Rack exceeded $2.5 billion in total sales.

Nordstrom’s stock is up about 5% YTD, and 17% over a two-year period, and currently trading at about the same price as when the company reported earnings on August 15. More importantly, according to the Stock Traders Daily real-time trading report, the stock is near a test of long-term support. This is important, as other big department store retailers on the lower-end, such as Macy's, Inc. (NYSE:M) and J.C. Penney Company, Inc. (NYSE:JCP) have recently been struggling. However, Nordstrom appears confident as the company continues to expand both its Rack stores and traditional mall stores.

Nordstrom Inc. announced its plans to open two key Nordstrom Rack stores in Summerlin, NV and Westwood, MA.  The first 36,000 square foot Rack store is located at The Shops at Summerlin, and has nearly 125 shops and restaurants, which includes Macy's, and Dillard's, Inc. (NYSE:DDS).  The second key Nordstrom Rack store to open is located at University Station in Westwood and covers 35,000 square feet. University Station is a retail, office, residential and hotel destination in Greater Boston spanning 2 million square feet and includes retailers such as Target Corporation (NYSE:TGT).  Nordstrom also plans to open its first Canadian store in Calgary next year and its first Toronto-based store in Yorkdale Mall in 2016.

One of Nordstrom's most impressive stats is its $400 in sales per square foot, however the company has also been investing in its e-commerce business to continually expand the selection available online and improve the online shopping experience. Nordstrom operates in the online private sale marketplace through its subsidiary HauteLook.  The acquisition of HauteLook was another smart move to build a loyal customer base among a younger and "hipper" brand of shoppers who are more likely to shop online for their favorite high-end brands.  Another great move has been providing some sales associates with smartphones where they can help customers to checkout, avoiding long lines and having receipts instantly emailed to them. 

As Nordstrom looks to benefit from the rapid expansion of its discounted Rack stores, the company might be able to hedge itself against relying on spending by the higher-end consumer. It is notable however, that Executive Vice President, Margaret Myers sold 8,670 shares of the stock in a transaction dated Wednesday, September 18. She sold at an average price of $58.25, for a total value of $505,027.50, while the stock was declining towards support (an odd time to sell).  The stock is near a test of long-term support, as defined in the real time trading report published by Stock Traders Daily, and that makes us interested in JWN so long as support holds.  As a rule, we are buyers near support, and as long as the stock remains above support we expect higher levels and a test of resistance.  However, support also acts as our risk control, and if support breaks lower the otherwise positive bias that exists now would dissolve, and sell signals would surface.  We keep our risk in check by limiting our entry levels to when support levels are tested, using support as a risk control measure, but this also helps us maximize return because if the channel holds we can take advantage of the entire oscillation from support to resistance again.

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