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Upscale department store operator, Nordstrom Inc. (JWN - Analyst Report) posted third-quarter fiscal 2013 earnings of 69 cents per share, outpacing the Zacks Consensus Estimate of 66 cents. However, the reported figure was below the year-ago comparable quarter earnings of 71 cents per share, primarily due to a 6-cent negative impact from the shift of Anniversary Sale event to the second quarter.

Total Revenue

Total revenue rose 2.8% year over year to $2,884 million and surpassed the Zacks Consensus Estimate of $2,881 million. Revenue growth was driven by a 2.9% year-over-year increase in Net Retail sales to $2,791 million and a 1.1% increase in Credit Card revenues to $93 million. However, quarterly sales were negatively impacted due to shift of the Anniversary Sale event to the second quarter compared with third quarter of fiscal 2012.

Total comparable store sales (comps) inched up 0.1% in the quarter against a gain of 2.9% in the year-ago quarter. The company registered 4.2% decline at its full-line stores, while comps at Nordstrom Rack increased 3.7%. The company’s direct net sales increased 23%, whereas Nordstrom Rack net sales rose 16%.

Additionally, Nordstrom's comps (including full-line and direct businesses) dropped 0.7% in the quarter, as against 11.2% rise in the year-ago comparable period. However, Women’s Apparel, Women’s Shoes, and Cosmetics continued to witness growth as compared with the prior-year period.

Operational Update

Gross profit in the quarter grew 1.7% year over year to $1,001 million. However, due to increased occupancy costs related to expansion of Rack Stores, Nordstrom's gross profit margin as a percentage of net sales at the retail segment contracted 41 basis points (bps) to 35.9%.

Total selling, general and administrative (SG&A) expenses increased 4.6% to $793 million in the quarter. As a percentage of sales, it increased 65 bps primarily due to rise in expenses related to shift of the Anniversary Sale event, increased investments for technological enhancements as well as expansion of Rack stores in Canada.

Nordstrom's operating income decreased nearly 8.0% to $208 million compared with $226 million in the prior-year period. Moreover, operating margin contracted 80 bps to 7.5% primarily due to lower gross margin and higher SG&A expenses as a percentage of sales.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $947 million compared with $1,158 million at the end of the year-ago quarter. Long-term debt net of current liabilities was $2,711 million versus $3,129 million in the prior-year period. During the first three quarters of fiscal 2013, Nordstrom generated $718 million in cash from operations.

Capital expenditures for nine months ended as of Nov 2, 2013 were $621 million. During the quarter, the company bought back nearly 2.7 million shares for about $155 million. Currently, Nordstrom has about $824 million worth of shares remaining under its existing share repurchase authorization.

Store Update

Nordstrom declared plans to open 4 Rack stores and relocate one Rack outlet in the remainder of 2013. During the quarter, the company opened 11 Rack stores and 1 full-line store. At the quarter-end, the store count totaled 257 as against 238 at the end of the prior-year quarter.

Guidance

Along with its third-quarter results, Nordstrom updated fiscal 2013 outlook. Nordstrom now expects total sales and comps to increase by 3.5% and 2.5%, respectively, compared with the prior forecasts of 3%–4% and 2%–3%, respectively. Further, gross margin is expected to contract 30–40 bps year over year.

Management projects SG&A expenses, as a percentage of sales, to rise 0 to 10 bps. Further, the company now expects interest expenses to decline $10 million, against the previously guided range of $5–$10 million.

Furthermore, the company raised its lower-end earnings forecast. Nordstrom now expects fiscal 2013 earnings to come in the range of $3.65–$3.70 per share as compared with the earlier guidance of $3.60-$3.70. The current Zacks Consensus Estimate is pegged at $3.68 per share, which dovetails with the company’s guidance range.

Management expects tax rate to be 38.3% compared with the earlier guidance of 38.6%.

Zacks Rank

Nordstrom currently carries a Zacks Rank #3 (Hold). Other stocks that are performing well in the retail-apparel/shoe sector include Finish Line Inc. (FINL - Snapshot Report), Gildan Activewear Inc. (GIL - Snapshot Report) and DSW Inc. (DSW - Snapshot Report). All of these carry a Zacks Rank #2 (Buy).

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