Shares of Fashion retailer Nordstrom, Inc. (JWN) might look hot to investors now as the company delivered solid second-quarter financials, with top-line growth and continued progress in its strategic initiatives. Its net sales increased 12% from the prior-year period, while its net earnings improved 57.5% year-over-year.
Although JWN reported fiscal 2022 second-quarter sales and earnings ahead of analysts’ estimates, the retailer cut its full-year forecast as the department store chain faces a glut of declining demand and inventory.
JWN now expects revenue growth, including retail sales and credit card revenues, up 5% to 7%, compared to a prior range of 6% to 8%. The adjusted EBIT margin is expected to be 4.3% to 4.7%, down from previous guidance of 5.6% to 6.0%. The company expects adjusted EPS of $2.30 to $2.60, down from a prior forecast of $3.20 to $3.50.
JWN has been losing momentum over the past few months as the retailer’s business has been hard hit by inflation, and investors are considerably jittery amid the uncertain macro environment. The stock has plunged 26.4% over the past month and 21.2% year-to-date to close the last trading session at $18.90.
So, investors could consider Dillard’s, Inc. (DDS) instead. DDS operates department stores in the southeastern, southwestern, and midwestern areas of the United States. The company also engages in general contracting construction activities. It owns and operates more than 280 Dillard’s stores.
DDS delivered solid results for the second quarter of fiscal 2022. William T. Dillard, DDS’ CEO, stated, “Business softened in the quarter as we lapped the strongest second quarter in our history. Our first half performance was far better than last year’s with net income up 21%, earnings per share up 44%, and gross margin up 240 basis points.”
Furthermore, DDS creates value for shareholders through share repurchases and dividends. During the second quarter, the company purchased $225.80 million of stock at an average price of $258.11 per share under its share repurchase program. It repurchased $412.30 million of stock during the first half of 2022 versus $171 million for the same period last year.
On August 18, DDS’ Board of Directors declared a cash dividend of $0.20 per share, payable on October 31. It pays $0.80 as dividends annually, yielding 0.28% of the current price. Its four-year average yield is 1.93%. Its dividend payouts have grown at a 26% CAGR over the past three years and 23.4% CAGR over the past five years. The company has increased its dividends for 11 consecutive years.
DDS’ shares have gained 14.6% year-to-date and 47.7% over the past year to close the last trading session at $287.30.
Here is what could influence DDS’ performance in the upcoming months:
Favorable Analyst Estimates
Analysts expect DDS’ revenue for the fiscal year 2023 (ending January 2023) to come in at $6.71 billion, indicating an increase of 1.4% from the prior-year period. The company’s EPS for the current year is expected to grow 84.8% year-over-year to $38.07.
In addition, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.
High Profitability
DDS’ trailing-12-month gross profit margin of 44.43% is 22.2% higher than the 36.35% industry average. The stock’s trailing-12-month EBIT margin of 17.51% compares to the industry average of 114.41%. Its trailing-12-month net income margin of 13.47% is 130.1% higher than the 5.86% industry average.
Furthermore, DDS’ trailing-12-month levered FCF margin of 11.40% is 567.9% higher than the 1.71% industry average. And the stock’s trailing-12-month ROCE, ROTC, and ROTA of 61.02%, 35.49%, and 28.96% are higher than the industry averages of 15.28%, 7.09%, and 5.12%, respectively.
Attractive Valuations
In terms of forward non-GAAP P/E, DDS is currently trading at 7.93x, 36.4% lower than the industry average of 12.47x. The stock’s forward EV/Sales multiple of 0.73 is 32.6% lower than the industry average of 1.09. Its forward EV/EBITDA of 4.67x is 46.1% lower than the industry average of 8.66x.
Furthermore, the stock’s forward EV/EBIT of 5.69x is 52.8% lower than the industry average of 12.05x. Its forward Price/Sales of 0.73x is 14.2% lower than the industry average of 0.85x. Also, its forward Price/Cash Flow multiple of 7.31 is 31.4% lower than the industry average of 10.66.
POWR Ratings Show Promise
DDS’ overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DDS has a grade of A for Quality, in sync with its higher-than-industry profitability metrics. In addition, it has a B grade for Value, consistent with its lower-than-industry valuation metrics.
DDS is ranked #10 out of 67 stocks in the Fashion & Luxury industry.
Beyond what I have stated above, we have also given DDS grades for Sentiment, Growth, Momentum, and Stability. Get access to all DDS ratings here.
Bottom Line
Despite the slowing demand, surging inflation, and other macro headwinds, DDS has delivered solid second-quarter financial results and maintained strong momentum over the past few months. The stock is currently trading above its 50-day and 200-day moving averages of $265.80 and $268.17, respectively, indicating an uptrend.
Furthermore, the retailer is known for paying attractive dividends. The company’s dividends have grown at a 26% CAGR over the past three years. Hence, instead of JWN, we think investing in DDS could be wise to ensure a steady income stream amid turbulent market conditions.
DDS shares were trading at $296.10 per share on Monday afternoon, up $8.80 (+3.06%). Year-to-date, DDS has gained 21.03%, versus a -18.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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