Nordstrom's Risk-Reward Balanced

The risk reward equation of the leading fashion retailer Nordstrom Inc. (JWN - Analyst Report), remains balanced, following the company’s better-than-expected second quarter 2012 results, upbeat guidance, store expansion plans and strong portfolio of globally recognized brands, offset by competition from other established players and exposure to seasonal fluctuations.

Established as one of the leading players in the specialty retail sector, Nordstrom enjoys a competitively advantageous position given its wide portfolio of over 500 brands. Targeted toward the whole family, through a nationwide network of more than 225 stores across 30 states, this strong line-up of renowned brands enables the company to generate high margin revenue, while bolstering its well-established position in the market.

Nordstrom reported better-than-expected earnings of 75 cents per share for the second quarter of fiscal 2012, beating the Zacks Consensus Estimate by a penny. However, the quarterly earnings were lower than the prior-year period earnings of 80 cents per share. Top line augmented 7.1% to $2,535 million, driven by robust performance at the company’s e-commerce business along with the customer loyalty program.

Buoyed by better-than-expected bottom-line performance, the company raised its earnings guidance range for fiscal 2012 to $3.40 – $3.50 per share from $3.30 – $3.45 forecasted earlier.

Further, Nordstrom remains focused on expanding its store network to drive top-line growth, evidenced by the company’s expansion into Boston, Massachusetts. Additionally, in June 2012, the company had announced the opening of two new Nordstrom Rack stores -- one in its hometown Seattle, Washington, and the other in El Paso, Texas. The Seattle-based store is expected to open in November 2012 while El Paso store is expected to start operating by the fall of 2013.

During fiscal 2011, Nordstrom added 18 new stores, which contributed 12.7% year-over-year growth in fiscal 2011 net sales. As of August 2, 2012, Nordstrom operated 117 Nordstrom full-line stores, 110 Nordstrom Rack, 2 Jeffrey boutiques, 1 treasure&bond store and 1 clearance store, thus bringing the total store count to 231.

Nordstrom is set to continue with its store expansion strategy in fiscal 2012 with a target of opening 16 new stores consisting of 1 full-line store and 15 Rack stores. In addition, the company plans to add 24 new Rack stores in fiscal 2013 and intends to operate 230 Rack stores by the end of 2016.

On the flip side, Nordstrom faces intense competition from other well-established players in the specialty retail sector such as The Gap Inc. (GPS - Analyst Report), Limited Brands Inc. (LTD - Analyst Report), Abercrombie & Fitch Co. (ANF - Analyst Report) and Saks Inc. (SKS - Analyst Report). Competitive conditions within the retail space may force the company to reduce its sales price, bringing down the company’s margins.

Further, Nordstrom’s business is seasonal in nature and generates a high proportion of sales during the second and fourth quarters, which are characterized by the company’s anniversary sale and holiday seasons. As a result, Nordstrom is exposed to significant risks, provided the seasons fail to deliver expected operating performance.

Another major element that may hurt the company’s growth and profitability is the diminished consumer confidence and spending behavior as macroeconomic factors like higher fuel and energy costs, credit availability, high unemployment levels and high household debt levels continue to affect their disposable income.

Nevertheless, the short-term outlook for Nordstrom remains positive, based on the encouraging results and the execution of its store expansion plans. The company retains a Zacks #2 Rank, implying a short-term Buy rating.