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Nordstrom (JWN) Up 4.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Nordstrom (JWN - Free Report) . Shares have added about 4.6% in that time frame, outperforming the S&P 500.

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

Nordstrom’s Earnings Beat Estimate in Q2, Sales Miss

Nordstrom reported better-than-expected earnings for second-quarter fiscal 2019. While the company’s bottom line reverted to a positive surprise trend after a miss in the previous quarter, the top line lagged the Zacks Consensus Estimate for the third straight quarter. Both the top and bottom line also decreased on a year-over-year basis. Consequently, management trimmed the upper-end of its earnings per share view.

Nordstrom’s earnings of 90 cents per share outshined the Zacks Consensus Estimate of 76 cents. Although the bottom line dipped 5.3% year over year, the metric benefited from robust inventory discipline and significant cost-containment efforts.

Year to date, the company has realized more than $100 million in cost savings, remaining ahead of its plans to generate nearly $150-$200 million in the current fiscal year.

Furthermore, the company is consistently focusing on the expansion of its local market strategy to New York City in order to drive the top line. It is slated to open a flagship store on Oct 24 along with two Nordstrom Local neighborhood hubs next month.

Q2 Highlights

Total quarterly revenues fell 4.8% to $3,872 million and also missed the Zacks Consensus Estimate of $3,933 million. While net Retail sales dropped 5.1% to $3,778 million, Credit Card net revenues advanced 8% to $94 million. Decline in the company’s top line reflected soft performance at its off-price business and the Anniversary Sale.

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) decreased 6.5% to $2,530 million in the fiscal second quarter.

The company’s off-price net sales (including Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores) also dipped 1.9% to $1,248 million.

However, the company is capitalizing on its strong inventory position to improve depth in major items and enhance in-stock levels. Moreover, it saw improvements in customer metrics on a year-over-year basis, during the Anniversary Sale.

As a result, management expects improved sell-through of Anniversary product to boost merchandise margin in the fiscal third quarter.

Meanwhile, the company’s digital sales grew 4%, representing nearly 30% of the overall net sales.

Nordstrom also continued to strengthen its loyalty program in the reported quarter. The Nordy Club has 12 million active customers, representing a 12% increase year over year and 64% of sales.

Operational Update

Nordstrom's gross profit margin contracted 50 basis points (bps) to 34.5% mainly on account of higher occupancy expenses. However, merchandise margin rate improved sequentially in spite of an elevated promotional backdrop.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, rose 26 bps to 31.2% primarily owing to higher fixed costs on lower sales.

This was partly offset by cost savings on account of Nordstrom’s continuous efforts to enhance efficiency and adjust performance-related expenses.

Earnings before interest and taxes (EBIT), as a percentage of net sales, declined 50 bps to 5.7% mainly due to lower sales.

Store Update

As of Aug 3, 2019, Nordstrom operated 381 stores across 40 states. These include 119 full-line stores in the United States, Canada and Puerto Rico, 248 Nordstrom Rack outlets, three Jeffrey boutiques, two clearance stores, six Trunk Club clubhouses as well as three Nordstrom Local service concepts.

Financials

Nordstrom ended the fiscal second quarter with cash and cash equivalents of $956 million, long-term debt (net of current liabilities) of $2,178 million and total shareholders’ equity of $759 million.

Nordstrom generated $692 million of net cash by operating activities and spent $480 million as capital expenditures during the first six months of fiscal 2019. At the end of the fiscal second quarter, it had a free cash flow of $304 million.

Moreover, the company bought back 4.1 million shares for $186 million in the first six months of fiscal 2019. Following this, nearly $707 million remained outstanding under the current buyback authorization. Additionally, it paid cash dividends worth $114 million in the same time frame.

Recently, it declared a quarterly cash dividend of 37 cents per share. This will be payable on Sep 16, 2019, to its shareholders of record as on Aug 30.

FY19 Guidance

Management updated guidance for fiscal 2019 to reflect second-quarter performance and anticipations for the back half.

The outlook does not include the impact of tariffs on goods imported from China as it is likely to be immaterial in the fiscal year.

The company now estimates net sales to decrease nearly 2% compared with the prior projection of flat to down 2%. Credit card revenues, net, are still expected to grow in the range of low to mid-single digit.

Further, the company expects EBIT of $805-$855 million, with EBIT margin of 5.3-5.6%. Earlier, management expected EBIT in the range of $805-$890, with EBIT margin of 5.3-5.8%.

Consequently, the company 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 earned last fiscal.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.49% due to these changes.

VGM Scores

Currently, Nordstrom has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nordstrom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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