Upscale department store operator Nordstorm (NYSE:JWN) closed the doors on its fiscal year in fine fashion, reporting solid, low-double digit sales and profit growth. It is also increasingly relying on its off-price sales channels until the United States economy is back on firmer footing. Overall, the company's growth potential remains solid, though the outlook for investors is slightly less compelling.

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Full Year Recap
Total revenues advanced 12.1% to $10.9 billion. Of those sales, $10.5 billion stemmed from the retail operations that consist of the namesake, full line stores that compete with the likes of Saks (NYSE:SKS) and privately-held Neiman Marcus at the higher end of the department store food chain, as well as a growing mix of Nordstrom Rack locations that sell marked-down merchandise that either qualifies as excess inventory or didn't sell as well at the upscale stores. The Rack concepts competes more with the TJ Maxx and Marshall's chains for TJX Companies (NYSE:TJX), or even more moderately priced rivals such as J.C. Penney (NYSE:JCP) or Macy's (NYSE:M). Same-store retail sales advanced 7.2%. The remaining roughly $400 million stemmed from credit card revenues, which declined a few percentage points but experienced healthier trends in terms of lower levels of bad debt.

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Operating income improved 11.7% to $1.3 billion as costs grew at roughly the same rate as the top line. The bottom line increase was similar, growing 11.4% to $683 million as interest expense and income tax expense also grew at a similar pace as sales and other costs. Share buybacks did boost earnings per diluted shares to $3.14, or growth of 14.2%. Higher capex levels lowered free cash flow production by more than 14% to $666 million, or approximately $3.06 per diluted share. (To know more about income statements, read Understanding The Income Statement.)

Outlook
For 2012, Nordstrom expects same-store sales growth between 4 and 6%, and earnings between $3.30 and $3.45 per diluted share. Analysts are currently projecting total sales growth of 10.5% and total sales just below $11.6 billion.

The day following the full year results, management announced plans to repurchase an additional $800 million of its common shares. It also increased the dividend by 17% to 27 cents per quarter. This pushed the dividend yield back above 1.8%.

The Bottom Line
At the current share price, Nordstrom trades at a forward P/E of about 13, if it hits the high end of its earnings expectations for the year. This is a reasonable valuation but also suggests the stock is far from a steal at current levels. Going forward, it is reasonable to assume mid- to high-single digit sales growth and a similar level of annual earnings expansion. Combined with the current dividend yield, if the valuation remains steady and the stock grows at a similar pace to profits, investors should be able to expect annual shareholder returns of around 10% per year. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)


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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.