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Tickers in this Article: JWN, SKS, M, V, TGT
Specialty department store retailer Nordstrom (NYSE: JWN) reported third-quarter results last week that exceeded the company's "internal plans and reflected continued improvement in our sales trends." The company isn't out of the woods yet as the consumer-spending climate remains chilled, but company and rival results indicate that tangible signs of a sales and profit recovery are starting to occur.

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Third-Quarter Results
Sales improved 3.5% to $1.87 billion as the opening of a single namesake store and six Nordstrom Rack locations proved sufficient in offsetting a same-store sales decline of 1.2% at the existing store base. Currently, Nordstrom operates 112 full-line namesake stores and 68 off-price Nordstrom Racks, which are used to clear excess inventory from the more upscale flagship stores. Nordstrom Rack has been the star performer as of late, given consumers are more price conscious and focused on discounts. Rack posted positive quarterly comps of 3%, while the namesake stores continued to struggle, posting a 4.2% drop in comps. Online sales, however, grew 16.4%.

Archrival Saks (NYSE: SKS) is experiencing an even tougher sales climate and recently reported a 10.1% drop in quarterly comps as total sales fell 8.7%. October trends improved, however, as total and comparable sales increased slightly. Rounding out the competitive landscape, upscale rival Neiman Marcus posted a more severe 14.9% decline in same-store sales as total sales fell 13.7% during its most recent quarter. Meanwhile, more mid-priced Macy's (NYSE: M) saw mid-single sales declines and reported another quarterly loss, though it said trends "improved progressively each month" as its quarter progressed.

Nordstrom's total quarterly sales beat analyst projections, but profits fell a penny short of expectations. Gross profits did improve 90 basis points and management kept a tight lid on inventory, which fell 10.7% per square foot. However, SG&A expenses and bad debts from its in-house credit card operations rose. Credit card write-offs from its private label and Visa (NYSE: V)-branded cards increased to 9.2% of average receivables and could increase to the double digits, mirroring the difficult trends that Target (NYSE: TGT) has seen as it also runs its credit operations in-house. However, the stronger sales trends allowed profits to grow 16.9% to $83 million and diluted earnings improved 15.2% to 38 cents per share.

Outlook
Nordstrom's Q3 results were encouraging and caused management to boost its full-year earnings guidance to $1.83 to $1.88 per diluted share. It still expects same-store sales to struggle and fall 6% to 7% while improvements in gross profit but higher SG&A expenses should persist for the entire year.

Bottom Line
Cash flow trends have improved markedly for the first three quarters of Nordstrom's fiscal year on strong inventory management and much lower capital expenditures. This leaves plenty of liquidity to fund a 1.9% dividend yield and should allow share repurchase activity to return eventually. Nordstrom should also be able to start paying down its fairly hefty debt, which ended the quarter at 61% of total capitalization and led to interest expense that ate up 22% of operating income.

Based off full-year company guidance, Nordstrom shares are currently trading at a forward P/E of approximately 19. Profits should improve to more than $2 per share once consumer spending rebounds, but as it stands currently the P/E multiple is still at the high end of its five-year range, indicating there isn't much room for multiple expansion until earnings visibility improves some more. (To learn more, see Analyzing Retail Stocks.)

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