Nordstrom Expects a Tough Holiday Season as Earnings Fall, Shares Tank

By Dan

Image: Nordstrom.

High-end retailer Nordstrom has stood up well, even during tough times in the retail industry, as its reputation for customer service and high-quality merchandise has helped it avoid some of the pressures that have plagued peers like Macy's . Coming into Thursday's fiscal third-quarter financial report, Nordstrom investors hoped that the company would be able to sustain some revenue growth, and keep earnings relatively flat.

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Nordstrom's results painted a different picture, though, and the retailer thinks that the holiday season could be even worse than some had anticipated. Let's look more closely at how Nordstrom did, and what it said about the future.

Nordstrom takes a diveNordstrom's fiscal third-quarter results fell short of what most investors had wanted to see from the retailer. Total revenue rose 6%, to $3.33 billion, which was slightly less than the $3.37 billion consensus forecast among investors. Net income plummeted 43%, to $81 million. Even after taking out the impact of the sale of Nordstrom's credit-card portfolio, adjusted earnings of $0.57 per share were $0.15 less than what investors had wanted to see.

Nordstrom saw weak performance in its retail stores. Comparable-store sales growth nearly evaporated, rising just 0.9%. The high-end Nordstrom segment saw comps climb just 0.3%, with store-based comps falling 2.2%, offset by an 11% rise in sales on the website. Similarly, comparable-store sales for the discount Nordstrom Rack store chain fell 2.2%, although online sales associated with the off-price line jumped 39%.

As we've seen in past quarters, the cosmetics line was the top-performing merchandise category during the quarter. Sales of coats, dresses, and younger customer-focused departments helped lead the Women's Apparel segment higher.

Nordstrom also continued to expand its network. The company added three full-line stores in the U.S. during the quarter, along with a location in Vancouver, Canada. Expansion in the Nordstrom Rack chain was far more robust, with 16 new locations opening in September and October.

The closure of the sale of Nordstrom's credit-card portfolio literally paid dividends for investors. The company noted that it paid a special cash dividend of $4.85 per share to investors during the quarter, representing half the net proceeds from the sale. Nordstrom expects to use the remainder to start a stock repurchase program.

Why Nordstrom sees a tough holiday season aheadIn addition to its challenging results in the third quarter, Nordstrom's guidance for the remainder of the fiscal year also fed investor pessimism. The retailer cut its outlook for sales growth by 1 to 1.5 percentage points, with a new range between 7.5% and 8%. Comparable-store sales will rise at a similarly reduced rate of between 2.5% and 3%, and the company expects about a half-percentage-point hit to gross profit margins. Nordstrom cut about $0.30 per share off its full-year earnings outlook, with new adjusted earnings of $3.40 to $3.50 per share excluding the impact of the credit-card transaction.

Nordstrom's news came as a shock to the entire retail industry. Macy's reported similar difficulties in its recent results, but many had hoped that Nordstrom's focus on higher-end shoppers and different customer demographics might prevent it from suffering the same fate as Macy's. The news from Nordstrom sent Macy's stock down in after-hours trading, as well, though not nearly to the same degree that Nordstrom stock lost ground.

Nordstrom shares took a huge hit from the bad news, dropping nearly 20% within an hour after the announcement. With the retailer having joined its peers in confirming the difficult conditions that the entire retail industry appears to face this holiday season, the rest of 2015 will be a nervous time for investors in Nordstrom, Macy's, and a host of other department-store retailers seeking to make the most of the high season for shopping.

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