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Why Nordstrom Could Be a Clear Pick Ahead of Earnings

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Nordstrom (JWN) may not exactly be a market leader in retail today, but there's a clear case to be made for picking up the stock just ahead of its earnings report.

Nordstrom reports third quarter earnings Nov. 21. According to one analyst's data, the report could show better-than-consensus revenue, as same-store-sales growth looks strong and price markdowns look to be abating, fattening gross margins.

Against this backdrop, Wedbush Securities analyst Jen Redding notes that Nordstrom is trading at a steep discount to its historical valuation level and to its peers.

Analysts polled by FactSet expect earnings per share of 64 cents and revenue of $3.66 billion for the quarter. But "we look for slight upside to consensus for third-quarter results at Nordstrom, driven mostly by strength at [Nordstrom Rack], where we are seeing notable improvement in traffic/revenue correlated search interest data," she wrote in a note.

"Our proprietary search data show full-priced stores among department stores in the third quarter year-over-year, with Rack also leading peers in the third quarter and showing a notable uptick in the most recent week of November," Redding said.

She added that she saw "broad stability across markdown product and styles rates as well as average price," and that the worst of Nordstrom's markdowns may be over for a while.

Last quarter, Nordstrom missed revenue estimates and beat on earnings, as the company corralled costs.

But price markdowns were a prominent part of the disappointing revenue. With fewer and less severe markdowns, the gross margin could expand to 34% this quarter from 33.3% in the year-earlier period.

The stock has had a rough 2019, down 26%, leaving it trading at just above 11 times forward one-year earnings estimates. That's a 34% discount to its five-year historical average of 17 times earnings.

It's worth noting that growth expectations have fallen in some pockets of that time frame. E-commerce players Amazon (AMZN) and trendy new players like Lululemon (LULU) have put both pricing and foot-traffic pressure on Nordstrom and peers.

But the 34% valuation discount is also far steeper than the average historical price-to-earnings discount of peers, which sits at 14%. Department stores like TJX (TJX) , Burlington (BURL) and Ross Stores (ROST) all trade at more than 20 times earnings.

Bottom line: The upside to Nordstrom shares is currently more than minimal. 

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