Morgan Stanley Says Sell Into The Strength In Nordstrom Shares

Morgan Stanley’s Kimberly C. Greenberger believes Nordstrom, Inc. (NYSE: JWN) shares are at an unsustainable valuation, “given limited scope for EPS growth & margin recovery,” and that stock strength should be used as an opportunity to trim positions.

Greenberger maintained an Underweight rating on the company, while raising the price target from $34 to $36.

Nordstrom reported Q2 EPS ahead of the estimate and the consensus, with comps also beating expectations.

The EPS guidance for FY16 was modestly raised from $2.50-$2.70 to $2.60-$2.75.

“Our discussion with management suggests the company is taking an understandably cautious 2H outlook, as outside of the strong response to the Anniversary sale event, 2Q sales trends showed similar weakness to 1Q's lackluster performance,” the analyst mentioned.

Surprising Comps

Greenberger expressed surprise at the Q2 comps beating the estimate, while the total revenue missed the estimate by $23 million.

This was also the first quarter that the company’s total revenue decline since 2009, which the analyst believes could be another sign of weakening trends at the high end.

Sales to comp spread also came in as a surprise, narrowing to 1 percent, which was attributed by management to accrual adjustments for expected returns at the end of Q2.

“JWN's best in class service and seamless shopping experience should keep it relevant long-term. However, 2Q results highlight many of the headwinds limiting JWN's earnings growth rate,” the analyst added.

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