Nordstrom Tries to Build Momentum Heading Into the Holidays

Department stores have had to deal with nearly unprecedented challenges in the retail industry, with threats coming not from adverse economic conditions affecting their customers, but rather from the emergence of e-commerce. Nordstrom (NYSE: JWN) has been at the high end of the retail market throughout its history, and some thought that it might prove immune to the pressures from internet retailers. Instead, the company has fared poorly, prompting extensive discussion about whether Nordstrom should go private rather than deal with short-term-minded shareholders as a public company.

Coming into Thursday's third-quarter financial report, Nordstrom investors were focused on the company's retail operations, and they had already braced themselves for declines in earnings and sluggish top-line growth rates. Nordstrom did better than those lowered expectations, but the company's outlook didn't give investors the same confidence that results from Nordstrom's competitors had offered. Let's look more closely at Nordstrom to see how it did and what to expect for the key holiday season.

Nordstrom keeps working to improve

Nordstrom's third-quarter results showed the challenges that the retailer faces. Total revenue climbed 2.5% to $3.63 billion, which was better than the $3.59 billion that investors had counted on seeing. The retailer reversed a year-ago loss by posting net income of $114 million, and earnings of $0.67 per share topped the consensus forecast of $0.64 per share on the bottom line. Still, that figure was down from adjusted results in the year-ago quarter.

Despite those results, some of Nordstrom's fundamental numbers weakened. Comparable sales for the full company were down 0.9% from the third quarter of 2016. Weakness was concentrated in the full-line Nordstrom brand, where revenue sank 1.2% on a 1.9% drop in comps. Men's apparel and kids' apparel were the top categories, reflecting the back-to-school season in part but also being somewhat of a surprise in moving away from the more typical outperformance of women's categories in recent quarters. The off-price Nordstrom Rack brand continued its track record of outperformance, but even there, segment comparable sales were up only 0.8%, although net sales climbed 5.5% on new store openings.

The western U.S. was Nordstrom's strongest region, and it was there that many of the retailer's new stores opened. All three new full-line stores in the U.S. opened in California, including two relocations from nearby stores. Out of a dozen new Nordstrom Rack locations, the majority were in the western part of the nation, including six locations in states on the Pacific Coast.

Nordstrom saw initiatives deliver varying degrees of success during the quarter. Online sales growth amounted to 14% year to date for and 26% for off-price websites and HauteLook. Nordstrom's proprietary labels outperformed, and the updated Nordstrom Rewards loyalty program claimed almost 10 million participants, up nearly 40% from year-ago levels and accounting for more than half of quarterly sales.

What's next for Nordstrom?

The big problem that Nordstrom still has is one it shares with nearly every traditional department-store retailer out there: its brick-and-mortar presence. Comparable sales at full-line store locations were down almost 5%, continuing a negative trend and requiring positive contributions from online sales to cushion the drop in comps. Even at Nordstrom Rack locations, comps were down 5%, showing that the off-price concept isn't necessarily the answer to trends away from in-person shopping.

Nordstrom doesn't see any immediate relief in the retail sector. The retailer kept its guidance for net revenue growth and comparable sales unchanged, with 4% top-line gains coming from flat comps. But the company shifted its expected sources of pre-tax operating income, cutting expectations on the retail side by $35 million to $55 million but boosting figures on the credit side by $20 million. Nordstrom guided investors to the bottom part of its previous earnings range, now expecting $2.85 to $2.95 per share on the bottom line.

Nordstrom investors weren't satisfied with the performance, and the stock fell 4% in after-hours trading following the announcement, giving up all of the retail stock's gains during the regular season prior to the release. Amid signs that the broader retail industry could be mounting a comeback, Nordstrom has yet to prove that it will fully participate in a move higher. Investors will want to see evidence from a strong holiday quarter before making definite conclusions about Nordstrom's long-term future.

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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.