Despite the various pressures impacting the consumer economy, luxury department store Nordstrom (NYSE:JWN) fared surprisingly well this year. Nevertheless, investors need to approach JWN stock with caution. Fundamentally, the underlying retailer faces an increasingly challenging math problem. Against so many variables, it’s probably best to stay away. Therefore, I am bearish on Nordstrom stock.
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JWN Stock Faces a Baseline Math Obstacle
In November of last year, TipRanks contributor Devina Lohia mentioned that because of the double whammy of high inflation and higher interest rates, credit card balances unsurprisingly registered their highest annual growth rate in 20 years. And that leads to the baseline obstacle facing JWN stock. At a certain point, consumers can’t just keep charging their discretionary purchases on their cards.
Even more problematic is that total credit card debt has been expanding aggressively. Back when Lohia published her article, consumer loans from credit cards and other revolving plans hit approximately $930 billion, according to data compiled by the Board of Governors of the Federal Reserve System. As of the latest read, this stat now reads $976.08 billion, or 4.95% higher from late November.
To hit the $1 trillion mark will only require a 2.45% move higher from present levels. At this rate, it’s possible that by June, the consumer credit card loan will hit 13 digits. That’s bad enough in and of itself. However, faced with several headwinds on the horizon, JWN stock appears destined to struggle.
Nordstrom Can’t Defy Gravity Indefinitely
Over the past 365 days, JWN stock lost a staggering 38.4% of its value. However, since January of this year, shares have managed to gain a bit over 9%. Still, investors should be wary about its overall resilient performance. With consumers already under pressure, circumstances may worsen before they improve.
First and foremost, accelerating mass layoffs don’t bode well for JWN stock. Initially, the job cuts impacted the technology sector, which already presented huge challenges for the consumer discretionary industry. Basically, this dynamic implies a lower addressable market for Nordstrom and its ilk as the number of wealthier consumers diminish. However, with the layoffs now affecting other non-tech-related spaces, Nordstrom may struggle even more so.
Second, the rise of consumer loans corresponds with the acceleration in layoffs. Throughout 2022, credit card debt increased by 16.24%. In the prior year, this debt load expanded by “only” 6.95%. Just in 2023 alone, this metric jumped 3.57% so far. Therefore, as consumers feel the heat, they’re less likely to open their wallets for frivolous luxuries, negatively impacting JWN stock.
Third, inflation remains a difficult challenge for Nordstrom and its ilk because of OPEC+ producers and their surprise production cuts. Critically, the move demonstrated that the Fed doesn’t represent the only influencer of dollar strength. Rather, by cutting production, more dollars will chase after fewer necessary goods, resulting in higher inflation.
Again, that’s not going to be helpful for JWN stock, especially with its consumer base already struggling from rising debt and mass layoffs.
A Deceptively Expensive Opportunity
On paper, JWN stock might seem a tempting deal for contrarian investors. Currently, the market prices Nordstrom shares at a trailing earnings multiple of 10.78. Compared to companies listed in the cyclical retail segment, the department store ranks better (lower) than 69.1% of its peers. Also, the market prices JWN at a forward earnings multiple of 8.33, ranking better than 86.8% of peers. Nevertheless, these might be deceptive stats.
Examining the matter more closely, it seems that Nordstrom’s low valuation might not be sustainable for long. In particular, its three-year revenue growth rate (per share) sits at -1.2%. As well, its net margin of 1.58% sits below the sector’s median value of 2.32%.
Put another way, Nordstrom’s earnings projections might be more optimistic than warranted. Therefore, if the company’s fiscal performance slips, JWN stock could actually be expensive.
Is JWN Stock a Buy, According to Analysts?
Turning to Wall Street, JWN stock has a Hold consensus rating based on two Buys, 10 Holds, and four Sell ratings. The average JWN stock price target is $18.67, implying 9.25% upside potential.
The Takeaway
Although JWN stock performed well against numerous consumer and economic headwinds, it probably can’t defy gravity indefinitely. Fundamentally, as a discretionary retail specialist, Nordstrom doesn’t really offer must-have goods. Instead, it caters to wants. Unfortunately, during a downturn, consumers focus on the essentials, not on the luxuries.
