Nordstrom Is Back In Fashion

By Ryan C. Fuhrmann | May 14, 2010 AAA

After an extremely difficult stretch brought on by the credit crisis, upscale department store retailer Nordstrom (NYSE:JWN) is finally seeing clients return to its flagship store with open wallets. Its share price ran up in anticipation of its sales and profit recovery, but a pullback from a new round of macroeconomic worries has placed the valuation back in more reasonable territory.
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First-Quarter Sales and Profit Trends
Sales improved 16.7% to a hair under $2 billion on the opening of two "full-line" namesake stores and five Nordstrom Rack stores, which offer discounted merchandise and compete with the Off 5th franchise from Saks (NYSE:SKS), Last Call from Neiman Marcus, and certain categories from the TJ Maxx and Marshalls concepts from TJX (NYSE:TJX). Nordstrom's top line was also boosted by a healthy 12% jump in same-store sales.

Sales of higher priced merchandise continued from the last couple of quarters and boosted gross margins by 245 basis points. This was offset by a rise in selling, general and administrative expenses, and technology costs as well as related new store openings. However, credit expenses remained flat as bad debt expenses from Nordstrom's in-house credit card offering fell. The end result was a 43.2% rise in net income to $116 million, or 52 cents per diluted share.

Outlook
Nordstrom boosted its full-year earnings guidance after the stronger-than-expected quarter and now expects diluted earnings between $2.50 and $2.65 per share. Comps should rise between 4% and 6% and analysts expect a 9.3% increase in total sales to just over $9 billion.

Bottom Line
Based on current company guidance, shares of Nordstrom are trading at a forward P/E of under 16. Sales should continue to see a boost as consumers shift gears from penny pinching to spending on more fashionable and higher priced apparel, footwear, and accessories. This trend should favor Nordstrom over rivals such as Macy's (NYSE:M) and JC Penney (NYSE:JCP) in the department store space.

And despite the economic climate, there will always be a market for "masstige", or prestige for the masses, which the rack stores address. As Saks continue to lag as a chronic underperformer and Neiman Marcus remains privately held, Nordstrom may be your best bet in the high-end department store industry. (Read Analyzing Retail Stocks to learn about the most important metrics for analyzing retail stocks.)

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