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Upscale department store operator, Nordstrom Inc’s (JWN - Analyst Report) third quarter fiscal 2012 earnings of 71 cents per share, missed the Zacks Consensus Estimate by a penny. However, the quarterly earnings reflected a jump of 20.3% from the prior-year period earnings of 59 cents per share.

Total revenue

Nordstrom’s same-store sales and top-line trends were encouraging for the quarter. Total revenue grew 13.3% to $2,808 million from $2,478 million in the prior-year period.

Further, it outdid the Zacks Consensus Estimate of $2,798 million. The year-over-year top-line growth was primarily driven by robust performance at the company’s stores that resulted in improved comps.

Nordstrom’s net sales (including full-line and direct businesses) increased 11.5% year over year. Total sales at Nordstrom Rack increased 16.3% from the year-ago quarter.

Nordstrom’s Direct sales revenue surged 38% from the prior-year period level on account of the company’s persistent initiatives in its e-commerce business. However, the company’s credit card revenue remained flat compared to last year at $95 million.

Comps for the third quarter gained 10.7% on top of the year-ago quarter, primarily benefiting from the shift in timing of the company’s Anniversary Sale event. Quarterly comps at the company’s business segments also came in strong, comprising an 8.1% increase in both Nordstrom full-line store comps and in Nordstrom Rack store comps.

Moreover, Nordstrom’s comps (including full-line and direct businesses) strengthened 11.2%, driven by robust performance in Men’s Shoes, Men’s Apparel and Kids’ Apparel categories.

Operational Update

Driven by the increased expenses related to the Fashion Rewards program that aims at enhancing customer relations, Nordstrom’s gross profit margin contracted 37 basis points (bps).

Further, retail selling, general and administrative expenses elevated 12.7% to $755 million in the quarter, primarily as lower expenses from the Anniversary Sale shift were offset by rise in costs related to the expansion of e-commerce business. On the other hand, credit selling, general and administrative expenses declined 19.3% year over year to $46 million.

Consequently, Nordstrom’s operating income augmented 15.4% to $277 million compared with $240 million reported in the prior-year period, while operating margin expanded 20 bps to 9.9%.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $1,158 million compared with $1,457 million at the end of third quarter fiscal 2011. Long-term debt at the end of the quarter stood at $3,129 million. During the first nine months of fiscal 2012, Nordstrom generated $507 million in cash from operations.

Capital expenditures through October 27, 2012 were $369 million. During the quarter, the company bought back nearly 1.5 million shares for about $85 million.

Guidance

Looking ahead, the company forecasts fiscal 2012 earnings per share, excluding the impact of future share repurchases, in the range of $3.45 - $3.50 per share, based on total same-store sales growth of 6.5% - 7.0%. The current Zacks Consensus Estimate is pegged at $3.48 per share, which lies near the higher end of the company’s guidance range.

Moreover, management is planning to increase its retail selling, general and administrative expenses year over year in the range of $340 - $355 million in, up from the previously projected range of $325 - $355 million, primarily to enhance e-commerce capabilities. Nordstrom anticipates a $30 million year-over-year increase in interest expenses due to a rise in its long-term debt level.

Further, gross margin is expected to contract between 40 bps and 50 bps year over year. Previously, the company was expecting contraction in the range of 35 bps to 50 bps.

Our Take

We believe that this upscale department store chain will continue to report better financial results in the near future. It is also expected to continue attracting more shoppers with its different mediums of sales channel as well as offers.

Based in Seattle, Washington, Nordstrom is a leading fashion specialty retailer in the U.S., offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, as well as a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.

However, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players, such as Gap Inc. (GPS - Analyst Report) and Limited Brands Inc. . The company primarily competes on the basis of fashion, quality and service.

Nordstrom's shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.

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