Nordstrom (JWN) Stock Falls Despite Q3 Earnings & Sales Beat

Nordstrom Inc. (NYSE:JWN) reported robust third-quarter fiscal 2017 results, wherein both its earnings and sales outpaced the Zacks Consensus Estimate. While the company delivered positive earnings surprise for the sixth straight quarter, revenues surpassed estimates for the second consecutive quarter. However, management lowered the higher end of its previously stated earnings guidance.

Consequently, shares of this leading fashion specialty retailer were down nearly 1.6% in the after-hours trading session. Overall, the stock is down 16.5% year to date compared with the industry’s decline of 18.4%.

Nordstrom’s quarterly adjusted earnings of 67 cents per share came ahead of the Zacks Consensus Estimate of 63 cents. However, the earnings included nearly 4 cents of adverse impact from hurricanes. Adjusting the hurricanes impact, earnings were in line with the company’s guidance.

Revenues

Total revenues advanced 2.5% to $3,629 million and also outpaced the Zacks Consensus Estimate of $3,602 million.

While the company’s net Retail sales increased 2% to $3,541 million, Credit Card revenues surged 25.7% to $88 million. However, total company comparable-store sales (comps) fell 0.9% due to declining comps at full-line stores, which were more than offset comps growth at Nordstrom Rack stores. Further, the anticipated impact of the hurricanes on sales decline was about $20 million, or 60 basis points (bps).

Nevertheless, retail sales gained from smooth execution of the company’s customer strategy along with disciplined inventory aided results in the quarter under review.

Moreover, the company’s fiscal third-quarter results reflected significant progress on its digital strategy. Nordstrom delivered online sales growth of 14% at Nordstrom.com and a 26% increase at Nordstromrack.com/HauteLook.

Net sales at Nordstrom full-line stores (including the U.S. and Canada full-line stores, Nordstrom.com and Trunk Club) decreased 1.2%, with comps declining 1.9%. The top-performing region during the quarter was the West while the best-performing categories were Men's Apparel and Kids' Apparel.

Coming to Nordstrom Rack (that includes Nordstrom Rack stores and Nordstromrack.com/HauteLook) net sales advanced 5.5% while comps inched up 0.8% on the back of growth in the Western region. Management stated that Nordstrom Rack business is approaching $5 billion in sales for fiscal 2017.

Operational Update

Nordstrom's Retail gross profit margin contracted 12 bps to 34.7% mainly on account of increased occupancy expenses linked to new store expansion for Nordstrom Rack and in Canada. Further, net sales increased 2% and inventory rose 1%.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, improved 161 bps to 31.2% mainly driven by increased technology and supply chain costs related to the company's growth efforts.

Store Update

In the fiscal third quarter, the company opened 11 new and relocated one Nordstrom Rack stores. Also, it introduced one full-line store each in both the United States and Canada. It relocated two full-line stores in the United States as well. So far this year, the company inaugurated a total of 19 new stores, relocated three outlets and closed two stores.

As of Nov 9, 2017, Nordstrom operated 366 stores in 40 states including 122 full-line stores in the United States, Canada and Puerto Rico, 232 Rack outlets, two Jeffrey boutiques, two clearance stores, seven Trunk Club clubhouses as well as Nordstrom Local service concept.

Financials

Nordstrom ended the quarter with cash and cash equivalents of $672 million, long-term debt net of current liabilities of $2,681 million and total shareholders’ equity of $854 million.

During the nine months of fiscal 2017, Nordstrom generated $597 million in cash from operating activities and negative free cash flow of $127 million. Capital expenditures during the same period were $536 million.

Guidance

Following third-quarter fiscal 2017 results, the company updated its previously stated earnings guidance for the fiscal year. Nordstrom continues to anticipate net sales growth of nearly 4% for fiscal 2017, with flat comps view.

Furthermore, the company lowered its previously stated Retail EBIT guidance. It now expects Retail EBIT in the range of $755-$785 million compared with $790-$840 million, anticipated earlier. This reflects higher occupancy costs linked to new stores (Nordstrom Rack, Canada and Manhattan flagship men's store) alongside increased supply chain and technology expenses. Meanwhile, Credit EBIT is estimated to be about $165 million versus the earlier forecast of about $145 million. This guidance includes greater credit card revenues with a decline in amortization expenses of $18 million associated with the credit card portfolio sale.

Based on the above iterations, the company now envisions fiscal 2017 earnings per share in the range of $2.85-$2.95 compared with $2.85-$3.00, projected earlier. Nordstrom’s guidance includes the impact of the additional 53rd week in fiscal 2017, which is likely to add about $200 million to net sales and 2-3 cents to earnings per share.

Furthermore, the hurricanes that occurred in the third quarter are expected to impact sales by $26 million, EBIT by $17 million and earnings by 6 cents per share.

Zacks Rank & Other Key Picks

Nordstrom carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the same industry include Zumiez Inc. (NASDAQ:ZUMZ) , Boot Barn Holdings, Inc. (NYSE:BOOT) and American Eagle Outfitters, Inc. (NYSE:AEO) , each holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zumiez, with a long-term earnings growth rate of 18%, has pulled off an average positive earnings surprise of 27.1% in the trailing four quarters.

Boot Barn Holdings, with a long-term earnings growth rate of 15.7%, has delivered positive earnings surprise of 100% in the last quarter.

American Eagle, with a long-term earnings growth rate of 8.7%, has delivered an average positive earnings surprise of 3.9% in the trailing four quarters.

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