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Nordstrom Inc. can withstand a year of store closures, according to Cowen analysts, who think other department-store retailers, including Macy’s Inc., have far less time should stores remain shuttered.
Nordstrom US:JWN announced last week that it would offer $600 million in 8.75% senior secured notes that mature in 2025, bolstering the company’s coffers.
Updating its previous forecast, Cowen analysts said Macy’s US:M has about four months, Kohl’s Corp. US:KSS has six months and J.C. Penney Co. Inc. US:JCP , about seven months.
Many retailers have already taken steps to cut costs, such as delaying capital investments and furloughing workers. But analysts say there will be a need for $500 million to $1 billion in working capital in order to purchase inventory for the second half of the year.
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“The ‘new normal’ could be a fall/holiday season that’s 30% lower and third-quarter expectations of down 50%,” wrote analysts led by Oliver Chen. “We believe it’s more prudent for retail teams to plan inventory buys for bear cases and hope for better performance.”
Cowen rates both retailers market perform, but has an $8 price target for Macy’s and $20 for Nordstrom.
Nordstrom’s Chief Executive Erik Nordstrom spoke at JPMorgan’s 6th Annual Retail Roundup last week and discussed the advantages that the luxury department-store retailer has, including its off-price Rack business.
“Further, management expects the current crisis to result in an accelerated shift to e-commerce (and omnichannel capabilities) with Nordstrom well-positioned to capitalize given the combination of multi-year digital investments and brick/mortar services (e.g. tailoring, stylists, convenient localized pickup/returns) leveraging the local market strategy (in process of scaling) and curated product and brand newness to drive foot traffic into stores,” analysts wrote.
JPMorgan rates Nordstrom stock neutral with a $22 price target.
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On the other hand, JPMorgan said there have been disruptions and increased out-of-stock notices on the Macy’s e-commerce channel due to widespread furloughs at the retailer, moving employees from San Francisco to New York, and other reasons.
“With e-commerce representing ~25% of sales and stores shuttered nationwide as of March 17, the current constraint to digital sales stands in stark contrast to apparel peers citing sequential digital acceleration during sheltering,” wrote JPMorgan in a separate note, highlighting retailers like Abercrombie & Fitch Inc. US:ANF that have seen digital business pick up.
“Compounding the issue, given mandatory store closures, Macy’s is not able to perform ship-from-store (with the exception of a small number of stores located near distribution centers) with fashion apparel lower on near-term customer shopping lists (vs. basics/sports/office) and Easter more or less a lost holiday.”
JP Morgan rates Macy’s stock underweight.
UBS analysts think margins will be a key variable, with the cost of clearing out excess inventory that has gone unsold due to the coronavirus pandemic a significant variable.
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“Retail first-quarter earnings will reveal the extent of gross margin pressure and year-over-year change in inventory levels,” analysts led by Jay Sole wrote. “If these numbers disappoint, it could drive big downward earnings per share revisions, in our view. We predict first-quarter industry inventory grows roughly 30% year over year.”
The Consumer Discretionary Select SPDR ETF US:XLY has sunk nearly 10% over the past year, while the SPDR S&P Retail ETF US:XRT has plummeted 26.4%. The S&P 500 index US:SPX is down 5% in the past 12 months.
