Nordstrom, Inc. Earnings: Investing for Growth

By Markets Fool.com

Nordstrom is actively investing for growth, and the company's earnings report for the quarter ended on January 31 shows that sales remain quite vibrant. On the other hand, growth can be quite expensive, and these investments are hurting the company's earnings and profit margins. Let's take a look at the latest earnings report form Nordstrom and the main takeaways for investors.

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Strong sales growth
Total sales during the quarter came in at $4.04 billion, a healthy year-over-year increase of 9% versus $3.7 billion in the fourth quarter of fiscal 2013. The number was better than expected; Wall Street analysts were, on average, forecasting $4.01 billion in revenues during the period.

Product sales generated $3.9 billion in revenues during the quarter, while credit card revenues brought in an additional $105 million. Total comparable sales jumped 4.7% versus a 2.6% increase in the same quarter during the prior year. This was quite a strong performance in the aggressively competitive retail environment.

Nordstrom comparable sales, which consist of the full-line Nordstrom and Nordstrom.com businesses, increased 4.5%. Most of this growth came from Nordstrom.com, with a big increase of 19% in sales during the quarter. Full-line net sales grew 1.2% on the back of a 0.5% increase in comps and two new store openings. The company ended the quarter with a total of 116 Nordstrom U.S. stores.

Nordstrom Rack is clearly firing on all cylinders. Net sales grew 17% versus the same quarter in the prior year, to $899 million. Comparable sales in this segment grew 3.2%, and the company opened 27 new stores in the last year, ending the quarter with a total of 167 Nordstrom Rack stores. Online sales in Nordstromrack.com and HauteLook jumped by an explosive 28% during the quarter.

Margins are under pressure
While Nordstrom Rack is being a big positive for the company in terms of sales growth, increased markdowns are having a negative impact on profit margins. In this context, gross profit margin declined to 36.7% of sales from 37.2% of revenues in the year-ago quarter.

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Nordstrom is doing quite well online, but investments for growth are taking their toll on profitability, too. Selling, general, and administrative expenses as a percentage of sales came in at 27.5%, a 110-basis-point increase compared with the same period in fiscal 2013. This was primarily due to expenses related to the acquisition of Trunk Club, and ongoing technology and fulfillment investments.

Due to tax adjustments related to a reassessment of deferred tax assets, the effective tax rate was 40.7% during the quarter, an increase versus an effective tax rate of 39% in the year ago period.

All these variables had a material negative impact on profits, and net earnings per diluted share came in at $1.32 versus $1.37 in the same quarter last year. Wall Street analysts were, on average, expecting a higher $1.35 per share for the quarter.

Moving forward
Management is planning to continue investing aggressively in 2015, so profit margins will remain subdued over the middle term. Total capital expenditures in fiscal 2015 are forecast to be in the neighborhood of $1.2 billion, a big increase versus $751 million in fiscal 2014.

Nordstrom will continue broadening its presence in Canada, which will have a negative impact on earnings due to infrastructure and pre-opening costs. Management calculates operations in Canada could create an estimated loss before interest and taxes of nearly $60 million.

Investments for growth, such as a new fulfillment center and the expansion of the Nordstrom Rewards loyalty program, both planned in the second half of 2015, should cost approximately $30 million. The acquisition of Trunk Clubs is expected to generate an estimated loss before interest and taxes of $30 million more.

For this reason, while the company is expecting healthy revenue growth of between 7% and 9% during fiscal 2015, profit margins will continue declining. Earnings per share are forecast to be in the range of $3.65 to $3.80, considerably below the $4.11 per share estimated, on average, by Wall Street analysts.

Overall, Nordstrom reported vigorous sales performance, so increased spending is generating solid gains for investors when it comes to the company's top line. Profits are a very different story, though, as increased discounts from Nordstrom Rack and rising expenditures are materially hurting margins.

Management will continue prioritizing future growth over current profitability in 2015, so investors in Nordstrom stock may need to continue exercising their patience while they wait for sales growth to translate into expanding earnings in the future.

The article Nordstrom, Inc. Earnings: Investing for Growth originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.