Option Trade 
Nordstrom, Inc. (NYSE:JWN) Calls 
Thursday, 18 February, 2016

**OPTION TRADE: Buy the JWN Jul 2016 55.000 call (JWN160715C00055000) at approximately $3.40. Place a pre-determined sell at $6.80.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.

by Ian Harvey

February 18, 2016

Nordstrom, Inc. (NYSE: JWN), a fashion specialty retailer, is forecasted to report earnings per share of $1.22 and a revenue of $4.26 billion for the 4th Quarter of the fiscal year 2016, after the market closes today. The Retail & Major Dept Store company announced last quarter earnings per share of $0.57 against a consensus Street estimate of $0.71, missing estimate by $0.14. The company posted revenue of $3.33 billion compared to an estimation of $3.38 billion.

Department store space has had a rough time in the past year, and just since last summer, formerly high-flying stocks, like Nordstrom has come back to earth, losing around 40% of its value.

The dreadful stock performance came in the context of weakening sales trends for department stores across the entire pricing spectrum.

Nordstrom faced a significant sales slowdown in Q3, which led to a big earnings miss. As a result, the company pared back its full-year 2015 sales guidance and reduced its EPS outlook by about 8% due to a weaker gross margin performance.

However, managed to grow sales throughout 2015, and performed quite well in the first half of the year. In fact, before cutting its guidance in November, Nordstrom had actually raised its guidance in August.

Furthermore, even in its "weak" third quarter, Nordstrom eked out 0.9% comparable-store sales growth and 6.6% total sales growth. And as of November, it expected full-year comp sales growth of 2.5% to 3% and total sales growth of 7.5% to 8%, well within its original guidance range for 2015.

Comparable-store sales at Nordstrom Rack declined 2.2% year over year in Q3, well below its previous trend of low-to-mid single-digit growth. Meanwhile, Nordstrom.com sales rose only 11% in Q3, compared to 23% growth in FY14 and 30% growth in FY13.

Nordstrom also saw a 2.2% comp sales decline in its full-line stores during Q3. However, it's not realistic to expect much (if any) growth in full-line in-store sales. By contrast, online and off-price retailers have been capturing bigger and bigger pieces of the retail sales pie.

For Nordstrom Rack, moderating growth could help get comp sales growth back into positive territory. During 2016, Nordstrom Rack should also benefit from the retail industry's inventory overhang, as it may be able to get great deals on merchandise that other retailers no longer want.

As for Nordstrom.com, the answer might simply be getting fresh products in stock this spring. Nordstrom is also adding more e-commerce distribution centers to reduce shipping times. One opened during 2014 and Nordstrom may be close to picking a site for another new e-commerce distribution center.

Vetr upgraded shares of Nordstrom, Inc. from a hold rating to a buy rating in a report issued recently. They currently have $51.31 price objective on the stock.

Also, Wolfe Research started coverage on Nordstrom in a research note on Tuesday, February 2nd. They set a peer perform rating on the stock. And Deutsche Bank decreased their target price on Nordstrom from $62.00 to $58.00 and set a buy rating on the stock in a research note on Wednesday, January 27th.

In related news, Director Philip G. Satre acquired 17,600 shares of the firm’s stock in a transaction on Monday, November 23rd. The stock was bought at an average cost of $56.89 per share, with a total value of $1,001,264.00.

A number of hedge funds recently bought shares of the company. One of the more significant ones was Conning Inc. which boosted its stake in Nordstrom by 51.4% in the fourth quarter. Conning Inc. now owns 5,079 shares of the company’s stock worth $253,000 after buying an additional 1,725 shares during the last quarter.

Harvey’s Options Volatility Indicator


Nordstrom hasn't provided any update on sales trends since its Q3 earnings report. However, it is better off than many other stores in at least one way: Nordstrom's inventory growth was roughly in line with sales growth during Q3. That means it probably didn't need to resort to margin-killing discounting last quarter.

It's also possible (if not likely) that Nordstrom's sales trend suddenly improved during the fourth quarter, just as it unexpectedly deteriorated a quarter earlier. More broadly, it's important to remember that retail trends can change on a dime. A poor end to 2015 doesn't mean that Nordstrom will have a bad 2016 -- let alone that it is doomed to long-term decline.

Indeed, despite the weak Q3 performance, Nordstrom CFO Mike Koppel forecast in November that EPS growth would accelerate in 2016. Furthermore, Nordstrom's low stock price will allow the company to buy back more shares with the proceeds from its recent credit card portfolio sale. Thus, the recent decline in Nordstrom stock could help sow the seeds for its own future recovery.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the JWN Jul 2016 55.000 call (JWN160715C00055000) at approximately $3.40. Place a pre-determined sell at $6.80.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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