Nordstrom Rebounding

By Ryan C. Fuhrmann | February 22, 2011 AAA

Upscale retailer Nordstrom (NYSE:JWN) reported fourth quarter earnings on Thursday that saw solid sales and profit growth. Much of the upside is still coming from a recovery in spending trends after the credit crisis and subsequent recession, but future growth will be led by new store growth.
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tNet sales increased 10.5% to $2.9 billion. Same-store sales rose 7.2% and include its full-line namesake stores as well as the Nordstrom Rack chain of discount stores that are used to clear excess inventory from the full-line stores. Nordstrom Rack comps increased 3.9% to cool off slightly from a down economy that made consumers more price conscientious and drove them into discount chains that also included Marshall's and TJ Maxx run by TJX Companies (NYSE:TJX) and Steinmart (Nasdaq:SMRT). Nordstrom also opened a new full-line store during the quarter.

Cost controls sent operating income up 31% to $406 million. This included a 52% drop in credit card costs from running in-house credit card operations that are generally quite profitable but saw increased charge offs during the recession. Big-box retailer Target (NYSE:TGT) also runs an in-house credit card operation. Slower income tax growth for Nordstrom helped send net income up almost 35% to $232 million, or $1.04 per diluted share. This came in ahead of analyst projections.

Annual Review
Full year sales improved a very healthy 12.4% to reach $9.7 billion. Cost controls again helped Nordstrom lever the solid sales gains into 34% growth in operating income to $1.1 billion. Net income jumped 39% to $613 million, or $2.75 per diluted share. Operating cash flow fell about 6%, primarily on the need to build inventories after the economic downturn. Capex rose slightly as well to send free cash flow down a bit to $778 million, or approximately $3.50 per diluted share.For the coming year, analysts project sales growth of almost 13% and total sales of $9.3 billion. Nordstrom said to expect comparable store sales between 2% and 4% and earnings in a range of $2.95 to $3.10 per diluted share, or year-over-year growth of 7.3% to 12.7%.

Nordstrom, along with archrivals Neiman Marcus and Saks (NYSE:SKS), are as pleased as anyone to have seen things return to normal after the credit crisis. Fears that shoppers would no longer pay up for fashion have quickly subsided and Nordstrom can keep growing throughout the country. With only 115 full-line stores and 86 Nordstrom Rack locations, there is plenty of real estate to expand into.

The company plans 17 new Rack locations for the coming year. At a trailing free cash flow multiple of about 13.5, the stock is as expensive as it has been in a long time, but an investment can still be justified as earnings growth looks set to consistently return to double-digit levels over the longer haul. (For related reading, also take a look at Analyzing Retail Stocks.)

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