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Nordstrom (JWN) Down 17.6% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Nordstrom (JWN - Free Report) . Shares have lost about 17.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nordstrom due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Nordstrom Beats on Q3 Earnings & Sales, Revises View

Nordstrom posted solid top- and bottom-line performance in third-quarter fiscal 2018. Both earnings and sales outpaced the Zacks Consensus Estimate. With this, the company marked its ninth earnings beat in the last 10 quarters, with a third consecutive positive sales surprise. Further, management updated its outlook for the fiscal year.

Q3 Highlights

Nordstrom’s adjusted earnings per share of 67 cents in the fiscal third quarter, outpaced the Zacks Consensus Estimate of 64 cents. However, the bottom line remained flat year over year. This is because gains from lower tax rate and higher sales were compensated by adverse impact of the new revenue recognition standard, which relates to the timing of the Anniversary Sale.

On a GAAP basis, including an anticipated credit-related charge of 28 cents, earnings per share were 39 cents.

Total quarterly revenues advanced 3.3% to $3,748 million in the fiscal third quarter and also exceeded the Zacks Consensus Estimate of $3,681 million. While the company’s net Retail sales increased 3% to $3,648 million, Credit Card net revenues grew 13.6% to $100 million. Moreover, Nordstrom’s loyalty program contributed roughly 56% to sales on a year-to-date basis, reflecting an increase of 15% from the year-ago period.

Top-line results for the quarter included an adverse timing shift of roughly 100 basis points (bps), mainly from the impact of the revenue recognition standard. However, impact of the revenue recognition standard remained favorable in the previous quarter. Excluding the timing effects, net sales for the second and third quarter of fiscal 2018 grew 5.1% year over year, on a combined basis.

Moreover, total comparable sales (comps) in the reported quarter rose 2.3%, reflecting strength in the underlying trends that improved 2.4% year to date.

Nordstrom’s customer strategy that focuses on three strategic factors — leveraging its brand’s strength, providing excellence services and offering compelling products — is also encouraging. Notably, the quarter saw a marked progress on its digital strategy as digital sales improved 20% in the fiscal third quarter. This represented about 30% of sales year to date. Further, the company’s generational investments in new markets and digital businesses remained impressive and contributed roughly 50% to sales growth year to date.

Furthermore, Nordstrom’s full-price net sales (including the U.S. full-line stores, Nordstrom.com, the Canadian operation, Trunk Club, Jeffrey and Nordstrom Local) grew 8.9% to $2,367 million in the fiscal third quarter, while comps inched up 0.4%. Also, the company’s off-price net sales (including Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores) advanced 8.7% to $1,281 million, while comps increased 5.8%.

Operational Update

Nordstrom's gross profit margin contracted 137 bps to 33.3%, mainly on account of an unfavorable timing shift from the impact of the revenue recognition standard and off-price mix. For the second and third quarters of fiscal 2018, gross margin fell 19 bps on a combined basis.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, grew 188 bps to 33.1% primarily driven by higher cost of sales as well as increased buying and occupancy expenses. Excluding the anticipated credit-related charge of $72 million, Nordstrom remains on track to accomplish its planned mid-single-digit improvement in SG&A expenses during fiscal 2018.

Store Update

To date in fiscal 2018, Nordstrom introduced 16 and closed two stores while relocated one.

As of Nov 15, 2018, the company operated 380 stores across 40 states. These include 122 full-line stores in the United States, Canada and Puerto Rico, 244 Rack outlets, three Jeffrey boutiques, two clearance stores, six Trunk Club clubhouses as well as three Nordstrom Local service concepts.

Financials

Nordstrom ended the quarter with cash and cash equivalents of $1,127 million, long-term debt (net of current liabilities) of $2,678 million and total shareholders’ equity of $1,203 million.

In the nine months of fiscal 2018, the company bought back 2.9 million shares for $157 million. Following this, nearly $1,438 million remained under the current buyback authorization. Nordstrom also paid cash dividends of $186 million in the same period.

Recently, it announced a quarterly cash dividend of 37 cents per share, which is payable Dec 11, 2018, to shareholders of record as of Nov 26.

Nordstrom generated $642 million of net cash by operating activities and spent $429 million as capital expenditures in the nine months of fiscal 2018. As of Nov 3, 2018, it had free cash flow of $247 million.

Guidance

Following the quarterly results, management revised its outlook for fiscal 2018. Excluding the non-recurring credit-related charges, Nordstrom is on track to deliver growth in the fiscal year.

Net sales are now projected in the band of $15.5-$15.6 billion, up from $15.4-$15.5 billion, guided earlier. Comps are expected to grow roughly 2% compared with the earlier forecast of 1.5-2% growth. Credit card revenues are still expected to grow in mid teens.

Further, the company expects EBIT (excluding the impact of credit-related charge) of $935-$960 million compared with the previous guidance of $925-960 million. Including the aforesaid credit-related charge impacts, EBIT is projected in the band of $863-$888 million. Fourth-quarter EBIT is likely to have a favorable comparison of $16 million from employee investments related to tax reforms last year.

Based on the above iterations, the company now envisions fiscal 2018 adjusted earnings per share to be $3.55-$3.65 compared with the prior guidance of $3.50-$3.65.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

Currently, Nordstrom has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Nordstrom has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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