Nordstrom, Inc. (JWN - Free Report) is losing footing in investors’ books, owing to strained gross margin trend. Investor sentiment for the stock was further hurt by the dismal second-quarter fiscal 2019 results, which were impacted by the persistence of soft sales trends in full-price and off-price businesses. Also, higher expenses due to increased fixed costs on lower sales remain an added concern. Consequently, management trimmed the upper end of its earnings per share view.
A glimpse at this stock’s price performance reveals that it has underperformed the industry so far in the year. Shares of this Seattle, WA-based company have lost approximately 38%, wider than the industry’s 31.1% decline.
Moreover, unimpressive estimate revision trend for the current and next quarter of fiscal 2019 buoys pessimism. Over the past 30 days, the Zacks Consensus Estimate has moved down by 5 cents and 8 cents to 67 cents and $1.53, respectively.
Reasons for Nordstrom’s Distress
Nordstrom has been witnessing soft gross margin for a while now due to higher expenses. In second-quarter fiscal 2019, gross margin contracted 50 basis points (bps) mainly on account of higher occupancy expenses. Although the company expects gross profit to improve in the near term due to higher sales during the anniversary sale, estimated sales decline in fiscal 2019 might dent gross margin in the long run.
The company’s growth strategy focused on enhancement of digital experience and increased investments in supply chain bodes well for the long term. However, investments related to occupancy, technology, supply chain and marketing have resulted in increased near-term costs. In second-quarter fiscal 2019, selling, general and administrative expenses, as a percentage of sales, rose 26 bps, primarily owing higher fixed costs on lower sales.
Notably, management had earlier stated that it expects to incur $35 million as pre-opening costs toward opening women's store in New York this October. All these expenses might weigh on the company’s margins and profitability.
Moreover, the company now estimates net sales to decline nearly 2% compared with the prior projection of flat to down 2%. It now envisions adjusted earnings per share of $3.25-$3.50 for fiscal 2019 compared with $3.25-$3.65 projected earlier and $3.55 anticipated in the last fiscal.
Can Efforts Aid Revival?
Nordstrom’s store-expansion efforts and customer-based strategy appear encouraging. The company remains keen on prioritizing its investments in the top North American markets. The opening of new stores is not only expected to attract customers but also boost its top line via synergies across other channels. Moreover, it has been progressing well with expansion in Canada by opening six Rack stores in fiscal 2018. Overall, the company envisions $1 billion sales opportunity from its expansion in Canada by 2020, including six planned full-line stores and 15 Rack stores. Furthermore, management remains keen on domestic store expansion.
The company’s significant progress on its customer-based strategy places it well to reach the revenue target of $20 billion by 2020. This strategy focuses on three strategic factors — leveraging the company’s brand strength, providing excellent services and offering compelling products to its customers.
Nordstrom is focused on advancing in the technology space, by boosting e-commerce and digital networks, and improving its supply-chain channels and marketing efforts. In second-quarter fiscal 2019, digital sales improved 4%, representing about 30% of sales growth. Further, the company is on track to achieve savings at the high end of the company-provided guidance of $150-$200 million.
We expect the aforementioned initiatives to act as tailwinds, injecting some momentum in this Zacks Rank #3 (Hold) company’s performance in the coming months.
3 Stocks to Watch
Zumiez Inc. (ZUMZ - Free Report) delivered average positive earnings surprise of 46.3% in the trailing four quarters. It has a long-term earnings growth rate of 13.5% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Canada Goose Holdings Inc. (GOOS - Free Report) has a long-term earnings growth rate of 28.5% and a Zacks Rank #2.
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