Top Trade Alert – Aug 11 2022 – Nordstrom (JWN)

    Nordstrom Earnings Presentation

    How about a good, old-fashioned earnings play?

    Nordstrom (JWN) is not a stock I generally like but it’s on sale at $23.80 and earnings are on the 23rd. Retailer to the Top 1%, who are unaffected (or benefitting) from inflation is a good place to be and they are a very steady $16Bn in sales with $500M to the bottom line but you can buy the whole company for $3.7Bn. Debt is $2.4Bn but that’s normal in Retail, they have about $5.4Bn in fixed assets (real estate and inventory) so no worries there. Applying a 3% boost to interest takes $75M off the earnings though – still less than 10x.

    They have 94 regular stores and 240 Rack (discount) stores in the US and maybe 20 more in Canada. They are buying back $500M of their own stock

    Nordstrom capital allocation

    As usual, just because it’s an earnings play doesn’t mean we need to take a big risk. For the Earnings Portfolio, let’s:

      • Sell 10 JWN 2024 $20 puts for $4.25 ($4,250)
      • Buy 15 JWN 2024 $20 calls for $8.40 ($12,600)
      • Sell 15 JWN 2024 $35 calls for $3.40 ($5,100)

    That’s net $3,250 on the $22,500 spread so we have $19,250 (592%) upside potential and $35 may be a stretch but the $30s are $4.70 so I thought it was worth the risk ($1,950) for $7,500 more upside potential. We risk being assigned 1,000 shares at $20 + $3.25 in losses and that’s the current price but the short puts are rollable and JWN pays a nice dividend so we don’t mind if we end up owning them at $23 and then selling 2026 puts and calls for $11 to knock it down to net $12, do we?

    As I often say – when your fallback strategy sounds like something you want to do anyway – it’s a good trade!