The retail industry has gone through tough times lately, and things have been especially difficult for high-end retailers like Nordstrom (NYSE: JWN). As shoppers become more comfortable with online shopping, department stores with substantial brick-and-mortar assets have had to adapt to changes in consumer behavior and meet them on their own terms, and that's been a difficult proposition for a company that prides itself on one-on-one customer service in the store setting.
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Coming into Thursday's first-quarter financial report, Nordstrom investors had expected only minimal gains in sales and earnings. Nordstrom did indeed see pressure on its top line, but bottom-line performance was a lot stronger than many had anticipated. Let's look more closely at Nordstrom and what its results say about its future prospects.
Image source: Nordstrom.
Nordstrom stays in the game
Nordstrom's first-quarter results showed the luxury department store retailer's tenacity in fighting difficult industry conditions. Revenue climbed 3% to $3.35 billion, which was a little bit better than the $3.34 billion in sales that investors had expected to see. However, net earnings jumped 37% to $63 million, and that resulted in earnings of $0.37 per share, fully $0.10 higher than the consensus forecast among those following the stock.
Looking more closely at Nordstrom's report, not everything was rosy for the retailer. Despite the rise in revenue, comparable-store sales were down 0.8% compared to the year-ago quarter, continuing a streak of negative comps for the company.
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Nordstrom's numbers also show the differences between full-line premium stores and off-price stores, as well as Nordstrom's online presence versus traditional stores. Comps at Nordstrom full-line stores plunged more than 6%, sending the full-price segment overall to a 2.3% drop in comparable sales. Off-price comps were up 2.3%, led by the Nordstrom Rack and Haute Look websites, which posted 19% gains. Nordstrom Rack stores actually lost ground, posting 0.9% declines in comparable-store sales. Throughout its business, Nordstrom saw the greatest strength in the Western region, and the retailer said that men's and women's apparel were the best formers among its key focus areas.
Nordstrom's efforts to contain costs were still evident. Gross margin rose slightly, but a considerable drop in overhead expenses helped to drive operating profit growth, although one-time charges in the year-ago period were also partially responsible for the boost.
What's ahead for Nordstrom?
With weakness in comparable-store sales, expanding its store network could be essential to keep Nordstrom growing. The company has opened six Nordstrom Rack stores so far in 2017, and it has closed a full-line store, showing the trend within the retailer's operations. With the shift, the number of Nordstrom Rack stores will soon be roughly double its full-line offerings, reflecting the prevailing demand from shoppers for lower-priced bargain items.
Nordstrom kept its fiscal 2017 guidance unchanged. The retailer still believes net sales will rise 3% to 4% this year, keeping comparable-sales gains near 0%. Nordstrom is expecting $2.75 to $3 per share in earnings, which is consistent with newer expectations among those following the retail stock.
Yet one sign of potential support came from Nordstrom's credit card unit. With a successful partnership with TD Bank (NYSE: TD), credit card revenue jumped 17%, and that produced a meaningful boost to Nordstrom's overall results. That contribution could become even more important if tough conditions in the retail industry continue for a while.
Nordstrom investors weren't happy with the report, and the stock fell another 5% in after-hours trading following the announcement. That's particularly painful given that Nordstrom shares had already fallen 7% during the regular session due to concerns from the broader retail industry. Until things markedly improve in a clear and visible way, it's going to be tough for Nordstrom to convince its shareholders that the worst is now behind it.
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