Can Nordstrom "Reinvent Itself?" - Dollar Gen (NYSE:DG)

The wealthy American consumer certainly isn't letting rocky markets affect their shopping habits. Or are they? Luxury retailer Nordstrom

JWN

reported third quarter earnings last night

that beat Wall Street estimates

, but the company did not guide 2011 full year earnings as high as Wall Street expected. As such, shares are down 3% in early Friday trading. The Seattle-based company reported earnings of 59 cents per share on $2.48 billion in revenues. Wall Street was looking for earnings of 58 cents per share on $2.37 billion in revenues. The fashion specialty retailer says it expects to earn $3.05 to $3.11 per share in 2011. Wall Street is looking for $3.14 per share in earnings. It also sees 2011 same-store-sales up 6%. Wall Street is not particularly enthusiastic about the report, with both

Goldman Sachs

and

J.P. Morgan

keeping their neutral ratings on shares. J.P. Morgan was particularly concerned about margin expansion, saying, "The retail margin performance left more questions than answers in our view..." The company is making investments in both its stores, and that is cutting the margins for Nordstrom. Goldman Sachs also touched on margin issues, saying, "given ongoing investments that would mitigate sales flow through..." Wall Street is having some concern about the company not boosting its forecast, given the earnings beat, and the fact we are moving into the fourth quarter. The fourth quarter is traditionally the most profitable for retailers, as it is the holiday shopping season. Any concerns about the holiday shopping season could mean a negative earnings impact for Nordstrm. Nordstrom caters to the higher income consumer, so the company not raising its earnings forecast to at least be in line with estimates is a little concerning. With operating margins around 12% and potentially falling, Wall Street does have a reason to worry about the health of Nordstrom, and potentially about the health of the holiday season in 2011. Nordstrom has been able to return almost 23% over the past 52 weeks, trouncing the S&P 500. Nordstrom may not need to "Reinvent itself", (a play on its slogan, Reinvent Yourself) but it definitely has to reassure analysts and traders that the luxury consumer is still doing well. Otherwise, Santa Claus may be delivering coal this year. Nordstrom trades at 13.8 expected 2012 earnings and sports a 1.8% dividend yield.

ACTION ITEMS:

Bullish:

Traders who believe that Nordstrom is being ultra conservative with their guidance might want to consider the following trades:

Consider using today's dip in Nordstrom shares to add to a position or initiate a new one.

Also consider other luxury retailers, like Tiffany TIF or Coach COH.

Bearish:

Traders who believe that the luxury consumer is starting to pull back on spending may consider alternate positions:

The only consume doing well is the luxury consumer. If that segment falls off, we could see another recession. In that case, the dollar stores would likely benefit as consumers still have to shop. Consider Dollar General DG, Dollar Tree DLTR and Family Dollar FDO.

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