Nordstrom Beats on Q1 Earnings, Shares Soar - Analyst Blog

Shares of Nordstrom Inc. JWN jumped 10.9% in yesterday's after-hour trading session following the company's better-than-expected first-quarter fiscal 2014 results.

The upscale department store operator's first quarter earnings of 72 cents per share not only came ahead of its own guidance range of 60–70 cents, but also surpassed the Zacks Consensus Estimate of 67 cents. We believe, the company's customer strategy continued to bear fruits, reflecting growth across channels along with efficient inventory and expense management.

However, on a year over year basis, the company's quarterly earnings came in a penny below the year-ago comparable quarter's earnings of 73 cents per share. The benefit of higher sales and reduced number of outstanding shares were more than offset by increased markdowns due to highly promotional environment and elevated investment towards technological upgrades and development of infrastructure in Canada.

Total Revenue

Nordstrom's total revenue of $2,931 million registered a 6.6% year over year growth, higher than its own guidance range of 3.5%–5.5% growth as well as the Zacks Consensus Estimate of $2,877 million. The year over year increase in revenue was primarily led by strong performance at its stores open for at least one year along with new store openings as well as robust online retail performance.

The company's Net Retail sales increased approximately 6.8% to $2,837 million while its Credit Card revenues grew nearly 2.2% to $94 million. Notably, sales trends in the quarter have improved when compared with the trends witnessed through fiscal 2013.

Total comparable store sales (comps) improved 3.9% in the quarter. The company registered a 1.9% decline at its full-line stores, while comps at Nordstrom Rack increased 6.4%. Moreover, the company reported comps gain of 33% in its Direct businesses mainly driven by ongoing technological investment towards expanding online presence and enhancing merchandise offerings. Nordstrom Rack net sales rose 20% benefiting from about 27 new Rack stores, open since the beginning of first quarter of fiscal 2013.

Nordstrom's comps (including full-line and direct businesses) rose 3.3% in the quarter, as against a 3.1% rise in the year-ago comparable period. Outperforming categories in the quarter included Women's Shoes, Accessories, and Cosmetics.

Q1 Operational Update

Nordstrom's retail segment gross profit in the quarter improved 3.2% year over year to $1,015 million. However, due to increased markdowns resulting from highly promotional environment during the quarter and higher occupancy costs related to the expansion of Rack Stores, Nordstrom's gross profit margin in the retail segment contracted 124 basis points (bps) to 35.8%.

Total selling, general and administrative (SG&A) expenses increased 5.4% to $844 million in the quarter. However, as a percentage of sales, it decreased 40 bps primarily benefiting from higher sales and lower variable expenses.

Nordstrom's operating income decreased nearly 3.6% to $265 million compared with $275 million in the prior-year period. Moreover, operating margin contracted 100 bps to 9.3% primarily due to lower gross margin offset by lesser SG&A expenses as a percentage of sales.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $1015 million lower than the prior year figure of $1,190 million. Long-term debt net of current liabilities was $3,110 million versus $3,119 million in the prior-year period. During the quarter, Nordstrom generated $217 million in cash from operations.

Capital expenditures for the quarter were $174 million. During the quarter, the company bought back nearly 3.2 million shares for about $192 million. Currently, Nordstrom has about $478 million worth of shares remaining under its existing share repurchase authorization.

Store Update

During first quarter, the company opened 10 new Rack stores, expanding the total company store count to 270 as against 260 and 245 at the end of fourth quarter and first quarter, respectively, of fiscal 2013.

Looking into fiscal 2014, Nordstrom plans to further expand its store base by opening 20 new stores in the remaining period of fiscal 2014, which include 3 full-line stores and 17 Rack stores.

Guidance

Despite improved top and bottom-line performances in the first quarter, the company kept its fiscal 2014 outlook unchanged as it believes the fiscal will remain challenging due to a highly promotional environment.

Nordstrom expects total sales to increase by 5.5%—7.5% and comps to rise in the range of 2%—4% in fiscal 2014. Further, gross margin is expected to contract 30–50 bps year over year. Management projects SG&A expenses, as a percentage of sales, to rise 0 to 20 bps. Further, the company expects interest expenses to decline $25 million in fiscal 2014. Tax rate is expected to be about 39.0%.

Nordstrom expects fiscal 2014 earnings to come in the range of $3.75–$3.90 per share, assuming shares outstanding of nearly 194 million. Moreover, the company projects loss before interest and taxes of $35 million for Canada in fiscal 2014 compared with a loss of $14 million incurred in fiscal 2013.

Other Stocks to Consider

Nordstrom currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the apparel and shoe space include Citi Trends, Inc. CTRN, American Apparel, Inc. APP and Foot Locker, Inc. FL. While Citi Trends sports a Zacks Rank #1 (Strong Buy), American Apparel and Foot Locker hold a Zacks Rank #2 (Buy).