December 7, 2022 | 3:03 PM by Jay Kunstman |

Nordstrom (JWN) – Softer Build in Demand

In the first two hours of JaguarLive on December 6th, weekly option flow was called out in shares of Nordstrom (JWN). Specifically, there were buyers of the December (9) Weekly 19.5, 18.5, and 18 Puts. When the message went out, the stock had seen 11,600 puts trade vs only 1,900 calls with put volume running 2.4x daily average. This option flow was taking place as Nordstrom management was speaking at the Morgan Stanley Consumer & Retail Conference. What were some of the key takeaways?

Interim CFO Michael Maher kicked off the presentation by reminding investors that they did reaffirm their annual guidance on their Q3 earnings call. “And just to remind everybody what was assumed in those ranges there. So the high end of the range assumed that we would see holiday sales build and customer demand build, consistent with what we used to see pre pandemic. So really accelerating as you get closer to Christmas. And that the level of promotional intensity would be consistent with what we saw late October, early November. The low end of the range assumed that the softness that we saw in late October, early November in the demand would be more of a persistent thing throughout the quarter and that the promotional intensity would be greater than what we were seeing at that time.”

Unfortunately, Mr. Maher indicated that at this point, they’re seeing demand build a little bit slower and the promotional intensity be a little bit higher than what they saw pre-pandemic levels. “But I think it’s important for us to emphasize that about 2/3 of our expected volume is still in front of us for the fourth quarter. So a lot is going to depend on how the next few weeks play out for us.”

Morgan Stanley’s Alexandra Straton would comment and ask about consumer pressures, particularly at Nordstrom Rack, and the strategy there.

CEO Erik Nordstrom would start off talking about the softness in certain customer segments. We started to see some pullback. And as we’ve analyzed it really was pronounced in our lower household income customer statements. That’s much more exposed to Rack than our Nordstrom banner business. And yes, we started to see that late June, kind of through July. And we have seen signs of customer pullback, but it is most pronounced at the lower income levels, which, again, is more the Rack customer. We have tremendous customer information. And there are signs of strain on the customer across all customer cohorts. It is most pronounced at the lower income level. So there is strain. I think customers are being more selective, a little more careful in their purchasing. And again, there is correlation with income levels, but it’s not the case where across the board customers are breaking down.”

Additional Evidence

JPMorgan analyst Matt Boss recently hosted Interim CFO Michael Maher, VP & General Manager NYC Chris Wanlass, and Head of IR Heather Hollander for a Flagship store visit and Q&A reception and the takeaways were again bearsh.

Mr. Maher provided an update on Q4 to-date performance stating that sales volumes are currently building slower relative to the pre-pandemic historical volume cadence, which in turn is driving management to increase promotional intensity above pre-pandemic levels (& relative to 11/22’s guidance).

By concept, management cited the softer build in demand vs. pre-pandemic levels is fairly consistent across both the Full-Line & The Rack concepts. By channel, brick and mortar stores continue to do well relative to digital, noting Q3’s digital sales faced a 700bps headwind from reducing store fulfillment for Nordstrom Rack digital orders, which is expected to continue through the first half of next year.

JPMorgan would lower their Q4 gross margins to 36.9% (below consensus at 37.9% and Nordstrom’s implied 38% guide) tied to more aggressive markdown actions.

Finally, as part of a collaboration, the JPMorgan derivatives team suggested to their clients to buy the Nordstrom January (2023) 15 Puts. “We recommend JWN Jan 20th $15 strike put options, indicatively paying $0.35 (1.9% premium vs $18.40 ref price) following JPMorgan management access, noting potential challenges from the holiday sales slowdown in 4Q and implications to 1H23.”

Password must meet the following requirements: