Will Nordstrom Gain Further Traction From Growth Initiatives?

Shares of leading fashion specialty retailer, Nordstrom Inc. JWN, have been gaining traction, backed by its store-growth initiatives, flourishing customer strategy reflecting growth across channels and its latest Trunk Club acquisition bearing fruit. These, in turn, led to strong third-quarter fiscal 2014 results.

Nordstrom offers a broad array of over 500 brands and caters primarily to the upscale segment through its globally recognized brands. This enables it to generate high-margin revenues. Nordstrom also appeals to its consumers by offering a more inclusive selection of quality merchandise, which further distinguishes it from other mall-based department store retailers.

Further, the company has been making continuous efforts toward its store expansion. In fact, quite recently, Nordstrom announced its plan to introduce another Rack store in Florida. This will mark the company's ninth Rack store in South Florida.

Nordstrom's focus on store expansion is evident from the series of Rack store openings since the beginning of fiscal 2014. Its latest store openings signify the company's commitment toward strengthening its network with the aim of driving top-line growth. Since the beginning of fiscal 2014, the company has opened 29 stores and currently operates a total of 289 outlets across 37 U.S. states and Canada.

Moreover, in a move to capture the rapidly growing men's clothing market, Nordstrom recently completed the acquisition of Chicago-based provider of personalized clothing services for men, Trunk Club. We believe that this acquisition strategically fits Nordstrom's business model.

Coming to its financial results, the company recently posted strong third-quarter results wherein its quarterly earnings of 73 cents per share came ahead of the Zacks Consensus Estimate of 71 cents and in line with the company's expectations. Earnings also rose 5.8% from the comparable prior-year quarter figure. On an average, the company has delivered a positive earnings surprise of nearly 4% over the past 6 quarters.

Also, backed by robust comparable-store sales growth, Nordstrom's total revenue of $3,140 million registered about 8.9% year-over-year growth and surpassed the Zacks Consensus Estimate of $3,108 million. Shares of the company have jumped 8.6% since the announcement.

Additionally, the company enjoys a healthy financial status as is evident from its regular dividend payments. Dividend payments highlight a company's stable cash position and cash flow generating capacity, indicating that it can be a growth and income stock.

All these factors speak positively about the company and highlight its solid growth prospects. Further, Nordstrom hit a 52-week high of $79.57 yesterday, before closing at $79.18 and displaying a year-to-date increase of 30.6%.

However, the company's projections for fiscal 2014 reflect higher costs across the board due to the ongoing investments, which will likely weigh on its margins. Moreover, we are cautious about the company's growth prospects due to the soft economic recovery, intense competition and exposure to seasonal fluctuations.

Nordstrom currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked retail stocks include Pacific Sunwear of California Inc. PSUN and Shoe Carnival Inc. SCVL, each sporting a Zacks Rank #1 (Strong Buy), and Bebe Stores, Inc. BEBE, holding a Zacks Rank #2 (Buy).