"Executional Misses" Hit Nordstrom Hard

The retail industry has been in turmoil for years now, as major department store chains wrestle to deal with the new competitive threat of e-commerce. Nordstrom (NYSE: JWN) was once seen as being largely protected from these competitive forces because of its emphasis on its high-end clientele. But even that niche proved to be vulnerable to internet-based rivals. After failed attempts from the Nordstrom family to retake control of the company, management redoubled its efforts to find success as a publicly traded company.

Coming into Tuesday's first-quarter financial report, Nordstrom investors were prepared to see some pressure on the company's financials, but they hoped to see signs that a long-term expansion was in place. Nordstrom's numbers called that assessment into question, and reduced guidance for the full year suggested that it could take longer for the retailer to regain its footing than previously hoped.

A tough start to 2019 for Nordstrom

Nordstrom's first-quarter results didn't live up to the retailer's full potential. Total revenue of $3.44 billion was down more than 3% from year-ago levels, dashing hopes among those following the stock for a modest top-line increase. Net income dropped by almost 60% to just $37 million, and the resulting earnings of $0.23 per share were barely half the consensus forecast among investors of $0.43.

As promised last quarter, Nordstrom's press release didn't include any information on comparable-store sales. However, given that the retailer said back in February that it expected comps to track closely with overall revenue movements, it's reasonable to assume that declines were in the 3% to 4% range, far worse than the 0.1% gain that Nordstrom managed to post three months ago.

Nordstrom pointed to several fundamental areas that hurt its results. The retailer rolled out its Nordy Club loyalty program during the period, and execution there didn't live up to expectations. Meanwhile, the company made a strategic decision to shift its marketing focus away from digital toward promoting the loyalty program, which caused disruptions to its prior digital strategy and led to digital sales growth of just 7% year over year. And finally, the mix of merchandise inventory for both its full-price and off-price segments played a role in pulling Nordstrom's revenue down. Full-price sales were down 5.1%, while off-price revenue eased lower by 0.6%.

Cost pressures also weighed on Nordstrom's results. Gross margin fell more than half a percentage point to 33.5% due to markdowns to reduce inventory. Overhead expenses as a percentage of sales jumped almost 1.7 percentage points to 34%.

Co-president Erik Nordstrom explained the situation: "While we expected softer trends from the fourth quarter to continue into the first quarter, we experienced a further deceleration. We had executional misses with our customers, and we're committed to better serving them." The executive assured investors that it's within the retailer's power to turn things around.

What's next for Nordstrom?

In response to the setback, Nordstrom laid out an ambitious plan to boost sales and profits. More effort to the loyalty program, digital marketing, and inventory realignment should help connect more effectively with customers, while cost-cutting measures are already on track to produce savings of $150 million to $200 million over the course of 2019. Key local markets like Los Angeles and New York will get special attention, including faster delivery and a planned flagship store in New York City set to open in October.

Yet the retailer won't be able to avoid a huge impact to its full-year results this year. Sales are now seen coming in anywhere from flat to down 2%, far worse than the 1% to 2% growth that Nordstrom previously projected. Earnings guidance got cut by roughly $0.25 to $0.40 per share, with a new range of $3.25 to $3.65 per share reining in expectations of a more promising near-term future for the upscale department store.

Nordstrom investors were highly disappointed with the news, and the stock plunged 9% in after-hours trading following the announcement. With the stock now at its lowest point in almost a decade, Nordstrom needs to follow through with impressive efforts in order to convince its shareholders that it can turn itself around given enough time.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.