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Analyst Blog

The long-term recommendation on the leading fashion retailer, Nordstrom Inc. (JWN - Analyst Report), is retained at ‘Neutral’ given the company’s slight earnings miss in the third quarter of 2012. However, strong top line growth and an encouraging guidance compensate well for the miss.

One of the leading players in the extremely fragmented specialty retail sector, Nordstrom offers a broad array of over 500 brands, targeted toward the whole family, through a strong nationwide network of more than 240 stores situated across 31 states. Nordstrom has a sturdy line up of globally recognized brands, catering primarily to the upscale segment, enabling Nordstrom to generate high margin revenue.

Nordstrom reported third quarter earnings of 71 cents per share, missing the Zacks Consensus Estimate by a penny. However, the company’s earnings rose over 20% from the prior-year quarter earnings of 59 cents on the back of robust top-line growth and effective cost management. Nordstrom’s same-store sales and top-line trends were encouraging for the quarter, as total revenue grew 13.3% year over year to $2,808 million, beating the Zacks Consensus Estimate of $2,798 million. Sustained focus on enhancing direct business and robust store performance were responsible for such top-line expansion.

Buoyed by strong quarterly performance, Nordstrom raised its earnings guidance for fiscal 2012 to $3.45–$3.50 per share from $3.40–$3.50 forecasted earlier. Going forward, we believe the company’s sustained focus on expanding store network along with enhancing online sales and consumer retention strategies will boost its top line and profitability.

Nordstrom remains focused on expanding its store network to drive top-line growth. During fiscal 2011, the company added 18 new stores, which contributed year-over-year growth of 12.7% to fiscal 2011 net sales. Moreover, Nordstrom will 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 has planned to add 24 new Rack stores in fiscal 2013 and intends to operate 230 Rack stores by the end of 2016.

Further, we believe Nordstrom's focus on customer service will help build customer loyalty, which in turn should support the comps. The company is making efforts to improve customer relations by introducing Fashion Rewards Program, which has over 2.6 million participants, and by announcing various rewards and benefits for the customers.

However, we remain slightly cautious on the company’s growth prospects due to sluggish economic recovery, intense competition and exposure to seasonal fluctuations.

Nordstrom faces intense competition from well-established players, such as The Gap Inc. (GPS - Analyst Report), Limited Brands Inc. and Saks Inc. , competing primarily on grounds of fashion, quality and service. To retain its market share amid such competition, the company may have to reduce its sales prices, which could affect its margins.

Driven by the aforementioned positives and negatives and in sync with its long-term recommendation, Nordstrom's shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating.

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