Nordstrom Is Put to the Rack

Few stocks performed better than upscale retailer Nordstrom (NYSE: JWN) in the years following the Great Recession. After bottoming out near $5 in November 2008 (after adjusting for dividends and splits), its share price crested above $61 in March 2015.

At that time, Nordstrom was regarded by Wall Street as a “best of breed” retailer in the United States. Headquartered in Seattle, it enjoyed an aura of merchandising expertise shared by coffee shop behemoth and cross-town neighbor Starbucks (NSDQ: SBUX).

But since then, the two companies have moved in opposite directions. While SBUX doubled over the past five years, JWN has lost more than two-thirds of its value.

Last week, JWN fell below $16 after releasing its fiscal 2023 Q1 results. The company recorded a loss of $1.27 per share during the quarter. After adjusting for one-time costs associated with closing its operations in Canada, the company eked out a tiny profit of 7 cents per share.

Nordstrom’s guidance for this year isn’t much better. The company expects total revenue to decline by about 5%.

The only optimistic language in the report concerns Nordstrom’s discount chain, Nordstrom Rack. In short, it appears the company is hustling to reinvent itself as a purveyor of upscale clothes at bargain basement prices.

That could prove difficult. The big-box discount retail space is dominated by established rivals including Walmart (NYSE: WMT), Kohl’s (NYSE KSS), and Burlington Stores (BURL).

Lost in the Amazon Jungle

The short explanation for the demise of Nordstrom is the emergence of (NSDQ: AMZN). Originally conceived as an online marketplace for books, Amazon now offers just about anything you can buy at Nordstroms.

It also sells coffee online, including some of Starbucks’ most popular brands. Coincidentally, Amazon is also headquartered in Seattle.

Starbucks understands it has two types of customers. People who want their favorite coffee at the cheapest price possible, and those who prefer to enjoy their daily cup(s) of coffee in a Starbucks store and are willing to pay a premium for that experience.

The same cannot be said for Nordstrom. It still has a cadre of loyal customers who are willing to pay a premium for the in-store customer service that the company is famous for. However, the size of that group is shrinking as more of its former customers are now shopping online.

That begs the question: Has Nordstrom become a “zombie company” that is destined to fail? Based on short interest in the stock of 17% of the float, it appears the buzzards on Wall Street are starting to circle the company.

Also, Nordstrom’s debt-to-equity ratio of more than 600% is a troubling sign. Especially with interest rates higher now than they have been in a long time.

Add it all up, and you have a company fighting for its life. Sales are falling, the company is closing down stores, and it won’t be able to carry that expensive debt forever.

Pay Me Twice

Despite Nordstrom’s severe problems, the options market hasn’t thrown in the towel yet. Even after last week’s bad news, the JWN call option that expires in January at the $15 strike price was selling for $3.

A call option increases in value when the price of the underlying security goes up. In this case, JWN would have to appreciate at least 18% within the next seven months for this option trade to break even.

At the same time, the put option that expires on the same day and at the same strike price was going for $2.50. And since a put option increases in value when the price of the underlying security goes down, JWN must decline by another 15% for that trade to be a winner.

I would not feel comfortable purchasing either of those options. However, I would be happy to sell both of them.

In that case, I would collect $5.50 in total premiums now. In exchange, JWN would have to either rise above $20.50 or fall below $9.50 by January for me to lose money on this trade.

This type of options strategy is known as a short straddle. It’s a great way to generate high income during periods of stock market turbulence.

It is not without risk, but it is considerably less risky than purchasing options. On average, it is one of the most reliable ways to generate consistently high income that is assessable to ordinary investors like me and you.

That isn’t my area of expertise but is for my colleague Robert Rapier.

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