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Should You Follow Ryan Cohen Into Nordstrom?

Barchart - Thu Nov 30, 2023

GameStop (GME) stock closed Monday trading at $11.91. By 2:30 EST Wednesday, it had jumped to $17.28 (45% higher).

According to speculation, many call options with a $20 strike were bought, expiring a week Friday, sending the shares into the stratosphere. The video game retailer’s options volume on Wednesday was nearly 10x its 30-day average of 70,408. 

There is no question the interest in GME stock has ratcheted up with its earnings out next Wednesday. I have no idea whether it will report anything out of the ordinary. Analyst estimates say GameStop will lose 12 cents a share in the latest quarter.  

For a moment, I thought about rerunning my June 8 commentary on Barchart.com describing the delusional nature of GameStop investors. The markets have gotten so frothy that speculation is ramping up for another kick at the cat. 

Hidden among the 694 unusually active call options on Wednesday was one from GameStop CEO Ryan Cohen's latest retail turnaround infatuation.

In February, Nordstrom (JWN) reported in its annual proxy that Cohen’s investment firm, RC Ventures LLC, had taken a 4.2% stake in the department store retailer. Further, it had asked the company for a waiver on its rights plan to acquire up to 19.9% of the company without triggering the 10% ceiling. 

At the time, its shares jumped to nearly $27 on the news, fell into the spring, went back into the $20s in late summer, and now have fallen back into the teens after Tuesday’s bump.

Investors believe Ryan Cohen walks on water despite the reality that he’s never run a profitable company before. 

Well, at least with Nordstrom, he’d start with a profitable business.  It generated a trailing 12-month operating income of $516 million (as of Oct. 28) on revenue of $14.13 billion.

Should you follow Ryan Cohen into Nordstrom? Maybe. Here’s why.

A Strong Brand

Although department stores have been getting killed for years, Nordstrom is a strong brand. That said, it didn't help it survive a failed Canadian expansion expected to cost it $1.74 a share ($284 million) in fiscal 2023 wind-down costs, plus the money it invested in getting the 13 stores open across the country. 

Nordstrom reported Q3 2023 earnings on Nov 21. 

Revenues were down 6.8% compared to last year, with the closed Canadian operations contributing 270 basis points to the quarterly sales decline. However, digital sales in the quarter increased by 11% over Q3 2022, accounting for 34% of its $3.3 billion revenue.  

On the bottom line, its adjusted EBITDA was $205 million, flat to a year ago. Its adjusted earnings per share increased by 25%, from $0.20 to $0.25. 

Excluding the impact of the Canadian operations and an extra week (53) in 2023, Nordstrom’s guidance for the year includes a 5% decline in revenue at the midpoint, with adjusted EPS of $2.00, 18% higher than in 2022. 

Based on its adjusted EPS for 2023 of $2, JWN stock is trading at 7.9x earnings. That’s generally in line with its department store peers.

Is it performing at the top of its game? Certainly not. 

What can Ryan Cohen bring to the table that would change this? Not much, I’m afraid. 

Cohen’s Masterplan

Much like GameStop, I doubt there is one. The man had impeccable timing with the sale of Chewy in 2017 -- sold to Petsmart for $3.35 billion -- just as the companion animal craze was starting to take off.

As I noted earlier, Chewy’s rarely been profitable in the six years since, and Gamestop hasn’t made money since fiscal 2018. The company may report positive results next week, which is driving the options interest, but as it stands at the moment, analysts expect another quarterly loss. 

In February, CNBC reported that Cohen is looking to cut costs at Nordstrom while also shaking up the board. Cost-cutting didn't work out well at Bed Bath & Beyond, and it appears to be making little difference at GameStop.

Yet Cohen believes he’s the answer to getting Nordstrom back on track. 

The Issues Facing Nordstrom

Let’s quickly address both issues.

Nordstrom currently has 12 board members. All but two are independent directors, except for Eric Nordstrom and Peter Nordstrom, both named executive officers and with other family members, who own approximately 30% of the company's stock.

From what I can see, all the board members appear competent, with several possessing significant retail experience, including James Donald (Starbucks) and Mark Tritton (Target and Bed Bath & Beyond). 

I’m no Nelson Peltz, but the average age of the board is reasonable at 53, neither too old nor too young. 

On the cost-cutting front, I’ll compare its margins today with those of 2015, when JWN traded at an all-time high of over $80.

In 2015, the company’s gross and EBITDA margins were 35.4% and 11.9%, respectively, compared to 36.3% and 7.5%. So, the top-line margin is not too bad, but it is leaving some EBITDA profits behind. Its SG&A margin in 2015 was 27.4%, while today, it’s 540 basis points higher at 32.8%. 

What’s contributing to the higher SG&A margin? My best guess is the answer would be found in the supply chain, specifically related to its digital business. As I said above, digital sales in Q3 2023 accounted for 34% overall. In 2015, digital was 21% of sales. With the advent of same-day delivery, costs would be higher than eight years ago.

Again, I don’t see what Ryan Cohen brings to the table that will move the needle. 

Bottom Line

If I were a Nordstrom shareholder who wanted somebody to fix the company, I would be more inclined to support El Puerto de Liverpool (ELPQF). This Mexican retailer owns nearly 10% of Nordstrom's stock. In business for 175 years, it’s done an excellent job keeping up with the times. 

I wouldn’t buy Nordstrom stock based on Cohen’s activist investing. However, were Liverpool to get involved, I’d reconsider. 

The Nordstrom call was the Jan. 5/2024 $15 call with a $1.20 ask. Expiring in 36 days, you can double your money on the call should its share price rise by $1.95, or 12.6%. Up nearly 12% over the past month, it’s got a shot. 

Given the possibility of a recession in the first half of 2023, I’d be more inclined to buy in the low teens if you were looking for a good entry point.


 



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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.