How Nordstrom Defied the Retail Meltdown

FAN Editor

Many retailers still haven’t found a surefire way to make a successful transition to a world in which digital commerce plays a vital and increasingly important role. Several of Nordstrom‘s (NYSE: JWN) primary competitors released quarterly financial results earlier this week that raised new concerns about the viability of their business models. As a result, those following the retail market figured that the company might see even its upscale department-store operations keep suffering from online competition. With the convenient exit of a leveraged buyout now seemingly off the table, the retailer needed to show that it could survive and thrive following its existing strategy.

Coming into Nordstrom’s second-quarter financial report on Thursday, its shareholders had high expectations about what they wanted to see. The company not only met those expectations, but exceeded them, and improved guidance for the rest of the year shows that Nordstrom is more confident than ever about its ability to remain a powerful force in the big-box retail industry.

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Good news from Nordstrom

Nordstrom’s second-quarter results were generally strong, with even more favorable news than in its first-quarter results. Total revenue climbed to $4.07 billion, up 7% from the year-ago period, which was faster than the 4% growth rate that most of those following the stock had anticipated. Net income jumped by 47%, to $162 million, and that produced earnings of $0.97 per share, well above the consensus forecast among investors for $0.84.

Fundamentals were a lot stronger for Nordstrom during the period. Comparable sales jumped 4%, accelerating from just a 0.6% pace in the first quarter. Some of the boost in overall revenue came from the timing of the company’s annual Anniversary Sale event and the way new accounting standards applied to that sale, but comparable-sales figures don’t include that distortion and so reflect true growth.

Digital sales were higher by 23%, accelerating from its 20% pace from a year ago. Nordstrom now is getting fully a third of its revenue from its digital channel, up 5 percentage points over the past 12 months. And digital sales during the Anniversary Sale soared 80% on the event’s first day, hitting a new record.

Performance across Nordstrom’s various business units was remarkably balanced. In the full-price segment, comps were higher by 4.1%, with particular strength in the kids’ apparel and beauty areas. The off-price Nordstrom Rack and Last Chance segment saw similar comps gains of 4%.

How Nordstrom is driving growth

Part of Nordstrom’s strategy has been to make smart choices about its store locations. So far in the fiscal year, the retailer has opened eight stores, while closing two others and relocating one. Nearly all of its expansion has happened on the Nordstrom Rack side of the business, although the Canadian market has gotten a new full-line store in addition to three Nordstrom Rack locations over the past 12 months.

Given its recent success, Nordstrom was able to boost its guidance for the full year. The company now expects net sales from its retail operations to come in between $15.4 billion and $15.5 billion, up $100 million to $200 million from its previous estimate. Comparable sales should go up by 1.5% to 2%, rather than the company’s more conservative initial projection for 0.5% to 1.5% comps growth. Nordstrom also pushed its earnings guidance upward by $0.10 to $0.15 per share, with a new range of $3.50 to $3.65 per share.

Nordstrom investors were impressed with the results, and the stock jumped 11% in after-hours trading following the announcement. Now that the department-store retailer seems to be on firmer footing and is demonstrating a digital strategy that’s working, Nordstrom could well pick up momentum heading into the key holiday season.

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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.

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