We can understand how the family views the narrow-moat company as having underappreciated value in the market.
News that the Nordstrom
family was exploring the option of taking the namesake company private sent shares soaring over 10% on June 8. Combined, the Nordstrom family owns just over 30% of the company. We are not surprised by this possibility as we have held that narrow-moat Nordstrom is better positioned than its no-moat department store peers, with a better-sized and -located store base (353 stores at the end of the first quarter versus Macy’s 668), exposure to the growing off-price sector (about 30% of revenue is driven by Nordstrom Rack), curated offerings that differentiate it from e-commerce competitors, and reputation for customer experience excellence. Therefore, we can understand how the family views the company as having underappreciated value in the market and note that our $53 fair value estimate (based on the assumption for 3.6% average annual revenue growth over the next five years and adjusted operating margin remaining in the 6% to 7% range) still implies that the stock is trading at a 19% discount even after the day’s stock move. Furthermore, we think the family could use time outside of public scrutiny to invest in growth areas like Nordstrom Rack and to better position the full-line business.
Bridget Weishaar is a senior equity analyst for Morningstar.
Although no proposal has been made yet, the company’s board of directors has formed a special committee consisting of the independent directors to act on behalf of the company and has retained a financial advisor and legal counsel. We feel that these are the appropriate steps to protect shareholder interest. We are refraining from determining if such a deal is favorable to shareholders as the family has not released any details regarding potential terms to the transaction. If necessary, though, we believe the balance sheet could support additional leverage with current net debt sitting at about 1 times adjusted EBITDA. In aggregate, we continue to believe the market is undervaluing the business and view shares as attractively priced.
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