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Comprehensive Nordstorm (JWN) Analysis- Earnings To SSS & Growth In 07

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By Douglas A. McIntyre Published
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By Yaser Anwar, CSC of Equity Investment Ideas

  • Nordstrom’s 3Q earnings of $0.52 were two cents above consensus. Results were driven by solid topline growth and significantly better-than-expected gross margin improvement, which primarily reflected lower markdowns during the quarter, particularly in women’s apparel.
  • Results also exceeded the company’s original guidance of $0.40 to $0.45. Strong topline results, combined with significant gross margin expansion & modest SG&A leverage drove 3Q results.
  • SSS increased 10.7% for the quarter better than the original estimate and company guidance for a low-single digit increase. To create a seamless customer experience across its stores and direct sales channels, JWN integrated its full-line stores and direct merchandise organizations in 06. The company also reduced its catalog mailing significantly and shifted the merchandise offering to be more aligned with the full-line stores.
  • JWN’s top line grew 12.4%, attaining a level the company has not achieved since 1Q04, when sales increased 15%. Sales growth accelerated across the Full-Line and Direct channels compared to the first half of the year as customers responded favorably to JWN’s Fall merchandise offering.
  • All major merchandise categories performed above the company’s LSD growth plan. For the first time this year, women’s apparel as a whole achieved positive SSS growth. Results in intimate apparel, accessories, women’s better, and designer apparel exceeded the company’s overall percentage increase.
  • In the Full-Line stores, the strongest regional performance was in the Midwest. JWN’s Direct and Rack channels achieved double digit SSS increases. The Direct division grew sales by over 30% and Rack posted a SSS increase of 11.6%.
  • Gross margin improvement of 156 bps to 38.0% was ahead of forecast of 37.1%. Gross margin improved YoY, driven primarily by lower markdowns, particularly in women’s apparel, men’s apparel, and women’s shoes.
  • Also, JWN continued to experience stronger sales in higher margin categories such as accessories. Above plan sales results created incremental leverage on buying and occupancy expenses. The rate improvement was partially offset by this year’s inclusion of $2.9 million in stock option expense.
  • Management anticipates the level of the associated long-term debt to be approximately $700 to $800 million, which will bring its total long term debt outstanding to $1.3 to $1.4 billion.
  • Growth plans for the next three years include opening 13 new stores and relocating or remodeling 18 existing stores. JWN opened one full-line store in March 06 and plans to relocate one full-line store and to open one Nordstrom Rack clearance store in fall of 06.
  • In 07, JWN is scheduled to open four full-line stores. In addition to retail expansion, JWN plans to drive sales growth in 07 by continuing work on three initiatives started in FY 06: developing more targeted merchandising strategies for the women’s apparel category; enhancing the women’s designer business, which the company believes contributes to the aspirational nature of the Nordstrom brand; and creating a more integrated, consistent merchandise offering across full-line stores and direct sales channels.
  • The best SSS performers in JWN’s full-line stores during FY 06 were accessories and cosmetics and men’s apparel. Sales of women’s apparel were mixed: intimate, junior and contemporary apparel were category leaders, while specialty sizes, better and bridge apparel had SSS declines.
  • To identify areas of improvement in its women’s apparel mix, the company has analyzed customer information and feedback from salespeople to better understand customers’ needs and shopping priorities in terms of style, price, fit and occasion.
  • While everything does appear to be rosy in the sector in general- investors should be careful- Why? Retail stocks tend to peak just before Black-Friday, which is this week – the busiest shopping day of the year – and then sell off through Christmas.
  • JWN’s numbers yesterday were pretty good, yet the stock sold-off partially. Retail sector has had quite a run and its time to take some profits.

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    About the Author Douglas A. McIntyre →

    Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

    McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

    His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

    A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

    TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

    McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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