Nordstrom Joins the Retail Celebration

By Markets Fool.com


Image source: Nordstrom.

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The retail industry has endured tough times during the past year or two, and even the best players in the business have faced difficulties in sustaining their success. Nordstrom (NYSE: JWN) has a long-held reputation for premium quality in its department stores, but it also has had to deal with an ultra-competitive environment in which price competition has even hit the upper end of retail price-point spectrum.

Coming into Thursday's second-quarter financial report, Nordstrom investors were bracing for expected drops in sales and profits compared to the year-ago quarter, and the department-store retailer wasn't able to avoid those declines. Nevertheless, given that the drops weren't as severe as some had feared, investors seemed satisfied that Nordstrom might have finally turned the corner. Let's take a closer look at how Nordstrom did to see whether investors are right to celebrate.

Nordstrom bounces back

Nordstrom's second-quarter results were somewhat mixed, but they outperformed the low expectations that investors had for the company where it really counted. Revenue of $3.65 billion was down more than 1% from the year-ago quarter, which was somewhat worse than the fraction of a percentage point that most of those following the stock had wanted to see. Net income also took a hit, falling 45%, to $117 million. But the resulting earnings of $0.67 per share were more than $0.10 higher than the consensus forecast among investors.

Taking a closer look at the report, Nordstrom wasn't entirely free of the downward trends in retail, but the pressure it was under seemed to let up a bit. Comparable sales fell 1.2% for the quarter, which was a slower pace of decline than the company posted in the first quarter of the year. As we've seen before in recent quarters, the parts of the company affiliated with the full-price retail segment, which includes Nordstrom stores in the U.S. and Canada, as well as the Nordstrom.com website, did even worse. Comps in that group fell 2.3%.

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Once again, though, the Nordstrom Rack discount concept did much better. The Nordstrom Rack brand division, which includes Nordstrom Rack retail locations as well as HauteLook and the Nordstromrack.com website, saw revenue jump 11%. Comparable sales jumped 5.3%, showing the value of the discount concept to Nordstrom's overall financial health.

In terms of popular segments, the beauty and shoe departments both showed strength at Nordstrom's full-line stores, and the portions of the women's-apparel department that focus on younger customers also did well. Nordstrom pointed out that its collaborations with limited-availability brands were particularly successful. The Midwest was healthiest for full-line stores, while Nordstrom Rack locations did best in the East, repeating trends seen in past quarters.

Nordstrom co-president Blake Nordstrom was pleased with the company's progress during the quarter. "Our team has been actively addressing our inventory, expense, and capital," Nordstrom said, and efforts to reduce inventory, as well as the success of the Anniversary Sale, helped send the company to better performance.

Can Nordstrom keep up the pace?

Investors were also pleased that Nordstrom chose to upgrade its outlook for the full 2016 fiscal year. The company still expects roughly flat comparable sales in a range of -1% to 1%, but it boosted its earnings projections to a new range of $2.60 to $2.75 per share, up between $0.05 and $0.10 from its previous guidance.

The news comes on the heels of strong performance from other major department-store retailers. For some of Nordstrom's competitors, closing underperforming store locations seems to be the best way to drive future growth.

Yet Nordstrom has done a good job of targeting its ongoing expansion plans to cater to areas that are promising. Moreover, Nordstrom's loyalty program has done well, and the retailer expanded the program to let customers earn benefits regardless of the payment method they used. Participating customer counts jumped 30% in just the past three months, reflecting the program's popularity.

Nordstrom investors liked the news, sending the stock up 11% in after-hours trading following the announcement, even after posting a 7% rise during the regular session prior to the release. Nordstrom still has a long way to go to recover fully, but the results show that the company has the capacity to bounce back if it can keep executing well.

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Dan Caplinger 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.