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Nordstrom (JWN) Gains on Q3 Earnings Beat; Raises View

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Shares of Nordstrom Inc. (JWN - Free Report) increased 4.4% in the after-market trading session, after the company posted superb third-quarter fiscal 2016 results, followed by a raised fiscal 2016 earnings outlook. While the bottom-line marked its second consecutive beat, the top line crushed estimates after four straight misses.

Nordstrom’s quarterly adjusted earnings of 84 cents per share came substantially ahead of the Zacks Consensus Estimate of 52 cents. The robust bottom-line results were driven by solid inventory alignment and operational efficiencies, along with strong sales that were backed by favorable shift of the company’s grand Anniversary Sale event.

NORDSTROM INC Price, Consensus and EPS Surprise
 

NORDSTROM INC Price, Consensus and EPS Surprise | NORDSTROM INC Quote

However, on GAAP basis, the company posted a loss per share of 6 cents for the third quarter as against earnings of 42 cents per share. This was mainly impacted by the impairment charge associated with Trunk Club, which was acquired in 2014.

Though Trunk Club is witnessing considerable sales growth, the company’s forecasts for its future profitability are lower than anticipated. Nonetheless, management stated that it is on track with numerous operational amendments to improve Trunk Club’s position and enhance consumer experience.

Sales

As predicted, the Anniversary Sale began a week later in July, thus extending into the third quarter. This boosted Nordstrom’s comparable store sales (comps), which climbed 2.4% in the reported quarter. The company further unveiled that on a combined basis, the second and third quarter comparable sales (that eliminates the effect of the event shift) inched up 0.4%.

Total revenue advanced 6.4% to $3,542 million, and came ahead of the Zacks Consensus Estimate of $3,489 million.

The company’s net Retail sales jumped 7.2% to $3,472 million, while its Credit Card revenues plunged 21.3% to $70 million.

Nordstrom brand’s net sales (including U.S. and Canada full-line stores, Nordstrom.com and Trunk Club) rose 2.4%, with comps rising 0.9%. The top-performing region during the quarter was West, while the best-performing categories were Women's and Men's Apparel.

Coming to the Nordstrom Rack brand (that includes Nordstrom Rack stores and nordstromrack.com/HauteLook) net sales advanced 10.1%, while comps grew 3.9% on the back of growth in the Eastern region.

Given the company’s focus on the expansion of its Nordstrom Rewards loyalty program, Nordstrom has gained over 7 million active Rewards customers, marking a 40% improvement from roughly five years ago. Additionally, during the third quarter, sales from the company’s rewards customers marked 45% of the total sales compared with 39% in the year-ago quarter.

Operational Update

Nordstrom's gross profit margin expanded 93 basis points (bps) to 34.8%, mainly on account of superb inventory management along with buying and occupancy expense leverage.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, declined 218 bps to 29.6%, primarily due to favorable year-over-year comparisons, expense leverage stemming from the shift of Anniversary event sales volume into the third quarter and solid initiatives undertaken by the company to enhance operational efficiencies.

Store Update

Year-to-date, Nordstrom introduced, relocated and shuttered down 26 stores, three stores and one store, respectively.

Financials

Nordstrom ended the quarter with cash and cash equivalents of $531 million, long-term debt net of current liabilities of $2,767 million and total shareholders’ equity of $860 million.

During the first nine months of fiscal 2016, Nordstrom generated $872 million in cash from operating activities. Capital expenditures during the first three quarters were $625 million.

Further, during the same time frame, the company repurchased nearly 1.9 million shares valued at $93 million. Currently, Nordstrom has about $718 million remaining under its share repurchase authorization.

Guidance

The company now anticipates net sales to increase nearly 3.5% in fiscal 2016, standing at the mid-point of its previous guidance of 2.5% to 4.5% increase. Further, comps are now estimated to remain flat compared with the previous guidance range of -1% to +1% growth.

However, given a sturdy third-quarter and Nordstrom’s inventory management and operational efficiency enhancement efforts, management raised its earnings outlook for fiscal 2016. The company now envisions fiscal 2016 earnings per share in the range of $2.85–$2.95, up from $2.60–$2.75 projected earlier. The current Zacks Consensus Estimate for fiscal 2016 stands at $2.71 per share, which is likely to witness an upward revision following the earnings release.

Including impairment charges, the company forecasts earnings to lie in the band of $1.70–$1.80 per share.

Zacks Rank & Key Picks

Nordstrom currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Tilly's, Inc. (TLYS - Free Report) sporting a Zacks Rank #1 (Strong Buy), while Foot Locker, Inc. (FL - Free Report) and The Gap, Inc. (GPS - Free Report) carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tilly's has an average positive earnings surprise of 73.7% in the trailing four quarters. The stock, with a long-term growth rate of 15.5%, has seen positive estimate revisions in the last 90 days.

Foot Locker has an average earnings beat of 3.1% in the last four quarters. Moreover, the company’s long-term growth rate of 9.9% and Earnings ESP of +0.91% bode well. The company is slated to report earnings on Nov 18.

Gap’s long-term EPS growth rate of 9.4% and positive estimate revisions over the past seven days help it stand strong in the industry.

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