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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

May 13, 2013 - Summer is Here, Let's Go Shopping!

The new styles are out; spring in the air. Call up your friends and hit the malls. It is time to get ready for summer. This year we have seen some late season snows, but winter is inevitably losing the battle and spring has sprung across the nation. Snow blowers are being stowed for the season as lawn mowers are getting tuned up as the flowers bloom. Some students are out of school already, gardens are going in and soon summer activities will be in full swing. Where has the year gone?

With all these new activities comes a need for new clothes. Do you like the way last year's swimsuit fits? Well, maybe it is time to check out the fashions for this year. With winter gone, spring cleaning is taking place. Mothers clean the closets, conduct yard sales and rotate clothes. The wife, the kids, the husband and everyone else needs a few new clothes. At least that is what the mothers say and smart, fashion-blind husbands are best off taking her word on that one.

Retailers are ready and have been for a while with racks full of the latest fashions. They know well what consumers are going to want and now it is grand scheme of marketing to get them into the stores to shop.

One store that may do a little better than average is Nordstrom's (JWN). Nordstrom's has over 240 stores under the Nordstrom and Rack brands run by 60,000 employees. Sales break down to be 33% women's apparel, 23% shoes, 15% men's, 12% women's accessories, 11% cosmetics, and 6% children's and other. The stores provide higher end service targeting a more affluent clientele.

While the economy still exhibits weakness, many people are employed and those working professional women who have more money than time are likely to head in picking up the latest fashions and getting out to life's more important events.

Clothes have a limited life cycle and after several years of limiting replacements, some people may feel a little more shopping is needed this year. Professional women always need to be looking good. As their finances grow more stable, their expenditures grow more reliable. 

Analysts expect sales to continue rising at Nordstrom. From 2003 to 2008, the company grew sales 5% annually with operating margins of 10.6%. When the recession hit, sales fell (-9%, -4%) for two years and operating margins fell to 5.6%. Over the last two years sales have been rising 8% with margins climbing back to 8.5% last year. While sales have caught up to historical trends there's still room for both improved sales and improved margins.

JWN reports earnings on May 16 with analysts expecting of $0.76 per share ahead of last year's $0.70. Last quarter the company reported $1.40 per share beating $1.34 estimates.

In retail, Nordstrom's looks strong as sales and earnings could continue to grow. Although competition among clothing stores is tough, JWN has a niche that is stable and growing. The stock has been in a slow uptrend, rising, in sympathy with the market, from 40 two years ago to 59. The September 57.50 covered call at 54.58 net debit has less than six months until expiration, a 5% assigned return, 5% of downside protection and an 11% annualized return rate (for comparison purposes only). This stock also pays a 2% dividend yield. While Nordstrom's can add some style to your closet, a covered call can bring some returns into your portfolio as well.

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