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Nordstrom (JWN) Up on Q3 Earnings & Sales Beat, Revises View

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Nordstrom, Inc. (JWN - Free Report) reported better-than-expected earnings and sales for third-quarter fiscal 2019. While the company’s bottom line marked second consecutive beat, the top line reverted to positive after three straight quarters of miss. Moreover, management raised the lower end of its earlier guided bottom-line view.

Quarterly earnings surpassed management’s expectations, thanks to the company’s smooth progress on strategic efforts and operational discipline. Also, the company witnessed improved top-line trends in its full-price and off-price businesses, driven by gains from loyalty program, digital channel and merchandise assortment. Year to date, the company accomplished $170 million in cost savings and remains ahead of its plans to realize nearly $150-$200 million in the current fiscal year.

As a result, shares of the Seattle, WA-based company jumped 8.4% in the after-market trading session on Nov 21. In the past three months, this Zacks Rank #3 (Hold) stock gained 21.6%, outperforming the industry’s 8.1% growth.


Q3 Highlights

In the quarter under review, Nordstrom’s earnings of 81 cents per share outshined the Zacks Consensus Estimate of 65 cents. Moreover, the bottom line rose 20.9% from the year-ago quarter’s adjusted earnings of 67 cents per share. Continued strength in the inventory execution coupled with robust cost-containment efforts fueled the bottom-line growth.

However, total quarterly revenues fell 2% to $3,672 million but surpassed the Zacks Consensus Estimate of $3,641 million. While the company’s net Retail sales dropped 2.2% to $3,566 million, Credit Card net revenues advanced 6% to $106 million.

Furthermore, Nordstrom’s full-price net sales (including the U.S. full-line stores,, the Canadian operation, Trunk Club, Jeffrey and Nordstrom Local) decreased 4.1% to $2,270 million in the fiscal third quarter. The company’s off-price net sales (including Nordstrom U.S. Rack stores, and Last Chance clearance stores) grew 1.2% to $1,296 million.

Notably, improved economics of the Anniversary event boosted merchandise margins across Nordstrom’s full-price business. Moreover, its off-price division delivered impressive sales and earnings as well as improved inventory turns for the eighth straight quarter.

Meanwhile, digital sales advanced 7% in the reported quarter. This represents 34% of the of the company’s business, up 300 basis points (bps) year over year. Nordstrom also continued to expand its loyalty program in the fiscal third quarter, as the Nordy Club had about 12 million active customers, representing growth of 13% year over year and 65% of quarterly sales.

Driven by Nordstrom’s market strategy in Los Angeles, sales growth outperformed the company’s other markets by nearly 100 bps in the fiscal third quarter. Encouragingly, management expanded this strategy to New York, San Francisco, Chicago and Dallas to offer products with same-day pickup or next-day delivery. Furthermore, the company has been receiving strong customer response for its NYC flagship store.

Nordstrom, Inc. Price, Consensus and EPS Surprise

Nordstrom, Inc. Price, Consensus and EPS Surprise

Nordstrom, Inc. price-consensus-eps-surprise-chart | Nordstrom, Inc. Quote

Operational Update

Nordstrom's gross profit margin expanded 100 bps to 34.3%. This upside was mainly on account of lower markdowns from inventory discipline in the off-price business and increased sell-through of products in the full-price business during the Anniversary event.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, declined 132 bps to 31.8%. Excluding the credit-related charges of $72 million in the year-ago period, expenses deleveraged by roughly 60 bps on account of pre-opening costs related to the New York City flagship store.

Further, earnings before interest and taxes (EBIT), as a percentage of net sales expanded 250 bps to 5.4%. Excluding the credit-related charges in the year-ago period, the EBIT margin rose nearly 50 bps.

Store Update

As of Nov 21, 2019, Nordstrom operated 381 stores across 40 states. These include 116 full-line stores in the United States, Canada and Puerto Rico, 249 Nordstrom Rack outlets, three Jeffrey boutiques, two clearance stores, six Trunk Club clubhouses as well as five Nordstrom Local service concepts.

Other Financials

Nordstrom ended the fiscal third quarter with cash and cash equivalents of $487 million, long-term debt (net of current liabilities) of $2,679 million and total shareholders’ equity of $851 million.

Nordstrom generated $569 million of net cash by operating activities and spent $741 million as capital expenditures during the first nine months of fiscal 2019. At the end of the fiscal third quarter, it had negative free cash flow of $114 million.

Moreover, the company bought back 4.1 million shares for $186 million in the first nine months of fiscal 2019. Following this, it had authorization worth of nearly $707 million remaining to be repurchased under the current program. Additionally, it paid cash dividends worth $172 million in the same time frame. Moreover, it declared a quarterly cash dividend of 37 cents per share. This will be payable Dec 16, 2019, to its shareholders of record as on Nov 29.

Furthermore, the company issued $500-million senior unsecured 10-year notes. Management expects this to be a leverage-neutral transaction as the proceeds will be used to completely retire its May 2020 notes.

FY19 Guidance

Following the quarterly performance, management revised guidance for fiscal 2019. Nordstrom projects net sales to decrease nearly 2%. Credit card revenues, net, are expected to grow in mid single-digit, compared with the earlier growth projection of low to mid-single digits.

Further, the company now expects EBIT of $815-$855 million with EBIT margin of 5.4-5.6%. Earlier, management expected EBIT of $805-$855 million with EBIT margin of 5.3-5.6%.

Consequently, the company now envisions earnings per share of $3.30-$3.50 for fiscal 2019 versus $3.25-$3.50 mentioned earlier, and $3.55 earned last fiscal. The Zacks Consensus Estimate for the current fiscal year is pegged at $3.33.

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