Nordstrom Beats Earnings Expectations

Company’s Anniversary Sale performed better than recent industry trends

Fashion specialty retailer Nordstrom Inc. (NYSE: JWN) announced its Q2 FY16 financial results on August 11th, 2016. The Seattle, Washington-based company operates under three segments: Retail, Credit and Corporate/Other.

Nordstrom currently operates 329 stores in 39 states, including 121 full-line stores in the U.S., Canada, and Puerto Rico; 200 Nordstrom Rack stores; two Jeffrey boutiques; and one clearance store, as well as its websites Nordstrom.com and Nordstromrack.com/HauteLook. The Company also owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its five clubhouses. It also operates approximately three Nordstrom full-line stores in Canada. In addition, the Company offers its customers a Nordstrom Rewards loyalty program along with a range of payment products and services. Read more about Nordstrom’s financial results below.

Q2 FY16 financial highlights

n1Nordstrom’s total sales during Q2 FY16 slipped 0.2% to $3.6 billion versus the year-ago period, while overall comparable sales decreased 1.2%. n2In the Nordstrom brand, including U.S. and Canada full-line stores and Nordstrom.com, net sales when combined with Trunk Club, slipped 0.4% and comparable sales decreased 2.3%.

Across U.S. full-line stores and Nordstrom.com, the top-performing merchandise categories were Beauty and Shoes. The younger Women’s Apparel performed well due to strength in denim and collaborations with new brands with limited distribution. The Midwest was the top-performing geographic region.

n3In the Nordstrom Rack brand, net sales jumped 11.2% and comparable sales grew 5.3% during the reporting quarter. The East was the top-performing geographic region.

During Q2 FY16, Nordstrom’s gross profit as a percentage of net sales was 34.3%, a decrease of 101 basis points compared to the year-ago period, due to markdowns done to align inventory to current trends and higher occupancy expenses related to new store growth. The combination of inventory realignment and its Anniversary Sale resulted in inventory growth of 1.4%, which partly offset a net sales decrease of 0.2%.

Nordstrom’s selling, general and administrative expenses as a percentage of net sales came in higher at 29.8% in Q2 FY16, an increase of 212 basis points, compared to the year-ago quarter. This increase was due to a $64 million benefit in FY15 associated with the sale of the credit card portfolio and expense deleverage from the shift in sales volume into Q3 FY16 related to its Anniversary Sale.

n4In all, Nordstrom’s Q2 FY16 net earnings were lower at $117 million and EBIT was $221 million, or 6.1% of net sales, compared with net earnings of $211 million and EBIT of $377 million, or 10.5% of net sales, during the year-ago period. Q2 FY16 EPS came in higher at $0.67 compared to estimates of $0.56. Retail EBIT decreased $59 million versus the year-ago period, due to higher planned technology, fulfillment and store pre-opening expenses as part of the Company’s growth initiatives. Credit EBIT decreased $97 million related to an expected reduction in net revenue from the revenue sharing program agreement with TD Bank, partly offset by a $64 million benefit from a non-cash accounting adjustment related to the sale of the credit card portfolio.

n5Other highlights

During Q2 FY16, Nordstrom expanded its Nordstrom Rewards loyalty program to enable all customers to earn benefits regardless of how they choose to pay. Through this expanded program, the Company has about 6 million active Rewards customers, up nearly 30% from 4.7 million in the prior quarter.

Growth initiatives: Nordstrom has been continuously investing in growth initiatives; its investments in HauteLook, its expansion into Canada, and its Trunk Club are expected to contribute over $1 billion to its FY16 sales.n6

Nordstrom is trying to attract more consumers to its stores through fresh merchandise. The company continues to expand its partnership with popular brands such as Ivy Park, Madewell, and Charlotte Tilbury. On July 27th, 2016, Nordstrom announced its plans to expand its partnership with Madewell by extending the brand’s availability in an additional 20 stores in the fall season of 2016. The company is also trying to enhance its consumer shopping experience through new mobile features, improvements to its website, and enhanced selling tools. The Company also plans to launch a new mobile feature that would enable customers to reserve merchandise online and try it on within the store.

n7Initiatives to improve margins: To mitigate the impact of these higher investments, Nordstrom plans to generate $150 million in productivity improvements in FY16, of which it has already achieved roughly 50%. In its marketing function, Nordstrom is enhancing its capabilities in customer analytics and digital engagement, aimed at serving customers in a more efficient and cost-effective manner.

Building supply chain efficiencies: Nordstrom has been investing heavily in order to support its online business and address changing consumer needs. This includes investments in technology, marketing, and supply chain. Nordstrom’s initiatives in supply chain include optimizing its supplier network for both inbound and outbound carriers, reducing split shipments through a greater allocation of merchandise to its fulfillment centers, and bringing lower-margin merchandise down from the online channel.

Store update

As of Q2 FY16, Nordstrom operated 200 Rack stores in the U.S. as well as 118 full-line stores in the U.S. and 3 full-line stores in Canada. Nordstrom plans to open 15 Rack stores in Canada, with the first slated to open in 2018, ending the year with a total of 215 Nordstrom Rack stores. In H1 FY16, Nordstrom opened six Nordstrom Rack stores and relocated one full-line store. Nordstrom plans to operate under 300 Rack stores by 2020. Nordstrom’s gross square footage was at 28,826,000 as of July 30th, 2016, as compared to 27,556,000 as of August 1st, 2015.

Share repurchases

During H1 FY16, Nordstrom repurchased 1.3 million shares of its common stock for $60 million. A total capacity of $751 million remains available under its existing share repurchase board authorizations.n8

Guidance for full year FY16

For FY16, Nordstrom expects net sales to increase by 2.5% to 4.5% and comparable sales to either decrease by 1% or increase by 1%.

Nordstrom revised upwards its guidance for EPS estimate to the range of $2.60 to $2.75 from the previous estimates of $2.50 to $2.70.

Additionally, Nordstrom’s five-year capital plan is shown alongside.

Stock Performance

n9Nordstrom’s stock ended the day at $52.66, slipping 0.57%, at the close on Tuesday, August 16th, 2016, having vacillated between an intraday high of $53.71 and a low of $52.26 during the session. The stock’s trading volume was at 4,351,018 for the day. The Company’s market cap was at $8.45 billion as of Tuesday’s close.

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