Nordstrom Beats on Q2 Earnings by a Penny, Narrows Guidance

Nordstrom Inc. (JWN) yesterday posted yet another quarter of better-than-expected results. Both top and bottom lines of the upscale department store operator also improved year over year in the second quarter of fiscal 2014. We believe the company’s customer strategy bore fruit again, leading to growth across channels along with efficient inventory and expense management.

The company’s second-quarter earnings of 95 cents per share came a penny ahead of the Zacks Consensus Estimate and were a couple of cents higher than the comparable prior-year quarter. Earnings mainly benefited from higher sales and a lower number of outstanding shares which were partially offset by elevated investment in technological upgrades and infrastructure development in Canada.

Total Revenue

Nordstrom’s total revenue of $3,392 million registered about 6.1% year-over-year growth and surpassed the Zacks Consensus Estimate of $3,384 million. The increase was primarily led by strong performance at its stores open for at least one year along with new store openings as well as robust online retail.

The company’s Net Retail sales increased approximately 6.2% to $3,296 million while its Credit Card revenues grew 4.3% to $96 million. Notably, sales trends in the quarter improved from the trend witnessed through fiscal 2013.

Total comparable store sales (comps) improved 3.3% in the quarter. The company registered a 2.7% rise at Nordstrom (which consists full-line stores and Direct businesses), while comps at Nordstrom Rack increased 4%. However, the company’s comps at full-line stores dropped 1.2%.

The company reported comps gain of 22% in its Direct businesses mainly driven by ongoing technological investment in expanding online presence and enhancing merchandise offerings. Nordstrom Rack net sales rose 18% benefiting from about 25 new Rack stores opened since the beginning of second quarter of fiscal 2013.

Q2 Operational Update

Gross profit of Nordstrom’s retail segment improved 5.9% year over year to $1,167 million. However, due to higher occupancy costs related to the expansion of Rack stores, Nordstrom’s gross profit margin in the retail segment contracted 7 basis points (bps) to 35.4%.

Total selling, general and administrative (SG&A) expenses increased 10.2% to $889 million in the quarter. Moreover, as a percentage of sales, SG&A expenses increased 100 bps primarily due to elevated investment in technological upgrades and development of infrastructure in Canada.

Nordstrom’s operating income decreased nearly 5.8% to $278 million from $295 million in the prior-year period. Moreover, operating margin contracted 100 bps to 9.3% primarily due to higher SG&A expenses as a percentage of sales.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $772 million, lower than the prior-year figure of $1,128 million. Long-term debt net of current liabilities was $3,111 million versus $2,715 million in the prior-year period. During the first two quarters, Nordstrom generated $369 million in cash from operations.

Capital expenditures for the first half of fiscal 2014 were $376 million. During the second quarter, the company bought back nearly 1.7 million shares for about $119 million. Currently, Nordstrom has about $359 million worth of shares remaining under its existing share repurchase authorization.

Store Update

During first half of the fiscal, the company opened 11 new Rack stores, expanding the total company store count to 271 from 248 at the end of second quarter of fiscal 2013.

For fiscal 2014, Nordstrom plans to further expand its store base with 16 openings in the remaining period.

Guidance

Bolstered by a better-than-expected quarterly performance, the company narrowed its fiscal 2014 sales and earnings guidance range by raising the lower end of the previously guided band.

Nordstrom now expects total sales to increase by 6.5–7.5% against 5.5%—7.5%. Comps is projected to rise in the range of 3–4% compared with 2% – 4%.

However, gross margin is now expected to contract in the range of 40–50 bps against 30–50 bps expected earlier. Moreover, management projects SG&A expenses, as a percentage of sales, to rise 10–20 bps compared with previous guidance of 0–20 bps. Further, the company still expects interest expenses to decline $25 million in fiscal 2014. The tax rate is expected at about 39%.

Nordstrom expects earnings in the range of $3.80 to $3.90 per share, assuming shares outstanding of nearly 192 million, against $3.75–$3.90 expected earlier.

Other Stocks to Consider

Nordstrom currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the apparel and shoe space include Citi Trends, Inc. (CTRN), The Buckle, Inc. (BKE) and L Brands, Inc. (LB). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Buckle and L Brands hold a Zacks Rank #2 (Buy).
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