Profit From Nordstrom's Return To Form

By Ryan C. Fuhrmann | August 06, 2010 AAA

Upscale department store retailer Nordstrom (NYSE: JWN) reported impressive sales and stellar profit growth during its second quarter. However, the market was apparently disappointed by the fact it kept full-year profit guidance the same. (To learn more, see Can Earnings Guidance Accurately Predict The Future?) The shares fell significantly as a result - representing a buying opportunity as the firm's long-term prospects remain bright.
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Second Quarter Sales Review

Net sales saw a 12.7% jump as same-store sales improved 8.4%, and the company relocated an older namesake store in California and a Nordstrom Rack discount store in New York. The "full-line", namesake comparable sales grew 8.2%, online sales jumped 34.1%, and the Rack stores saw a reversal of their strong trends as comps fell 0.9%. This last data point serves as another indication that consumers are starting to trade up into more fashionable (and expensive) apparel and related offerings.

Management cited jewelry, dresses and women's shoes as standouts for strong sales. The Midwest and South regions "were the top-performing geographic" at the full-line stores. Credit card revenue increased nearly 13%, though it only accounted for 4% of total revenue. Delinquencies fell to 3.5% from 3.6% in last year's quarter.

Profit Recap

Nordstrom was also able to sell higher-priced merchandise. As a result, gross margins improved 133 basis points. However, SG&A costs increased 60 basis points, as the company is starting to think about expansion again after two years of reining in costs to offset a plummet in consumer spending.

Operating earnings increased 32% to $272 million, or 10.8% of sales. Lower interest expense helped push net income ahead 39% to $146 million, or 66 cents per diluted share. This met analyst projections for the quarter.

Outlook

Analysts expect full-year sales to grow 10.8% to $9.1 billion. The company didn't provide total sales guidance during the earnings release, but it did say it expects comps to grow 4-6%. Management projects earnings between $2.50 and $2.65 per diluted share.

Bottom Line

The stock swoon after the release has put the forward P/E into very reasonable territory at below 12, if Nordstrom hits the high end of its earnings guidance. Cash flow trends weakened for the first half of the year, but those are due mostly to building up inventory as shoppers return to more normalized spending levels. Recent results by Macy's (NYSE: M) and J.C. Penney (NYSE: JCP) confirm these trends, though they serve the market's middle.

Nordstrom, Macy's Bloomingdales stores, Saks (NYSE: SKS) and privately held Neiman Marcus serve the higher end, and current indications are that these stores are seeing the biggest pick-up in activity. Neiman recently reported that July sales jumped in the double digits and quarterly sales improved in the high-single digits. Saks is set to report its results next week, as is Target (NYSE: TGT), which should see a shift to its more fashionable offerings in the big-box retailing space. (To learn more, see Analyzing Retail Stocks.)

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