Nordstrom’s Comparative Sales Proves Laggard

Retailer’s total sales grew 2.4% to $4.2 billion compared to $4.1 billion in the year-ago same period

Fashion specialty retailer Nordstrom Inc. (NYSE: JWN) announced its Q4 FY16 and full-year FY16 financial results on February 23rd, 2017. The Seattle, Washington-based Company operates under three segments: Retail, Credit and Corporate/Other.

Nordstrom currently operates 349 stores in 40 states, including 123 full-line stores in the US, Canada, and Puerto Rico; 215 Nordstrom Rack stores; 2 Jeffrey boutiques; and 2 clearance stores, 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 3 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.

Q4 FY16 financial highlights

During Q4 FY16, Nordstrom’s total sales grew 2.4% to $4.2 billion compared to $4.1 billion in the year-ago same period. On the other hand, comparable sales for the reporting quarter decreased 0.9%. On the other hand, specialty athletic retailer Foot Locker Inc. (NYSE: FL) was among the few apparel retailers to clock positive sales and comp sales. In the Nordstrom brand, including US and Canada full-line stores and Nordstrom.com, net sales when combined with Trunk Club, decreased 1.1% and comparable sales fell 2.7%.

Across US full-line stores and Nordstrom.com, the top-performing merchandise categories were Women’s Apparel and Beauty. The younger customer-focused departments in Women’s Apparel continued to outperform, reflecting strength in denim and collaborations with new and emerging limited distribution brands. The East was the top-performing geographic region. In the Nordstrom Rack brand, which consists of Nordstrom Rack stores and Nordstromrack.com/HauteLook, net sales jumped 10.7% and comparable sales grew 4.3%.

CEO Blake Nordstrom stated in an earnings call with investors, “We are focused on speed, convenience and personalization.” He noted a 45% increase last year in customers buying items online and picking up the purchases at a store. Additionally, a mobile feature that enables shoppers to reserve items online, and then travel to a store to try them on resulted in more than 10,000 reservations during its pilot phase and will now be rolled out to 50 full-line stores.

To offset declining foot traffic in malls, Nordstrom is investing in e-commerce and off-price offerings. Nordstrom’s website now accounts for 25% of full-price sales, up from 20%.

Retail gross profit of 36%, as a percentage of net sales, increased 112 basis points versus the year-ago same period, reflecting strong inventory execution and reduced competitive markdowns. Inventory declined 2.5%, reflecting a positive spread of 5% relative to sales growth.

During the reporting quarter, selling, general, and administrative expenses of 27.6%, as a percentage of net sales, decreased 60 basis points versus the year-ago comparable period, primarily due to asset impairment charges of $50 million in 2015 and a non-operational legal settlement gain of $22 million in FY16. This was partially offset by performance-related costs.

In all, Nordstrom’s Q4 FY16 net earnings $201 million and EBIT was $424 million, or 10% of net sales, compared to net earnings of $180 million and EBIT of $324 million, or 7.8% of net sales, for the year ago comparable period. Retail EBIT increased $84 million compared with the same quarter last year, reflecting non-operational items in 2016 and 2015. Excluding these items, Retail EBIT increased $12 million, or 3.3%. Credit EBIT increased $16 million, primarily due to higher credit card revenues.

FY16 financial highlights

During FY16, Nordstrom’s net sales grew 2.9% to $14.5 billion versus $14.1 billion in the prior year, while comparable sales decreased 0.4%. The Company continued market expansion into Canada for a total of 5 full-line stores, including 2 Toronto store openings in fall 2016, contributed $300 million in total sales. Nordstrom.com sales reached over $2.5 billion, representing approximately 25% of Nordstrom full-price sales. Nordstrom Rack sales grew 11% percent to $4.5 billion driven by 21 new store openings and 32% online growth; Nordstromrack.com/HauteLook reached $700 million, or over 15% of off-price sales.

Nordstrom Rewards active customers grew 56% to 7.8 million; sales from Nordstrom Rewards customers represented 44% of sales in FY16.

Retail gross profit, as a percentage of net sales, of 34.9% decreased 7 basis points versus FY15. Selling, general and administrative expenses, as a percentage of net sales, of 29.8% increased 19 basis points versus the prior year. The Company made progress in improving operational efficiencies, reflected by moderated expense growth related to technology, supply chain and marketing of 10%, relative to an annual average of 20% over the past five years.

Return on invested capital (ROIC) for the 12 months ended January 28th, 2017 fell to 8.4% compared to 10.7% in the prior 12-month period, primarily due to the non-cash goodwill impairment of Trunk Club. Excluding this impairment, adjusted ROIC of 11.7% increased 97 basis points, benefiting from the sale of the credit card receivables.

During FY16, Nordstrom’s net earnings were $354 million and EBIT was $0.8 billion, or 5.6% of net sales, versus net earnings of $600 million and EBIT of $1.1 billion, or 7.8% of net sales, for FY15. Retail EBIT decreased $210 million relative to last year, primarily due to asset impairment charges and other non-operational items in 2016 and 2015. Excluding these items, Retail EBIT decreased $55 million, or 5.7%, primarily due to higher technology and fulfillment costs supporting multi-channel growth. Credit EBIT decreased $86 million relative to last year due to the revenue-sharing program associated with the sale of the credit card receivables in October 2015.

Other highlights

Store update: Nordstrom continued market expansion into Canada for a total of 5 full-line stores, including 2 Toronto store openings in fall 2016. 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. Nordstrom currently operates 349 stores in 40 states, including 123 full-line stores in the US, Canada, and Puerto Rico; 215 Nordstrom Rack stores; 2 Jeffrey boutiques; and 2 clearance stores. Nordstrom’s gross square footage was at 29,792,000 as of January 28th, 2017, versus 28,610,000 as of January 30th, 2016.

Share repurchases and dividend: During Q4 FY16, Nordstrom repurchased 4.0 million shares of its common stock for $189 million. A total of approximately $1.0 billion remains under existing share repurchase board authorizations, including the February 2017 authorization.

On February 17th, 2017, the Board of Directors authorized a repurchase program of up to $500 million of the Company’s outstanding common stock, through August 31st, 2018. This program is in addition to the Company’s existing repurchase program that was approved by the board in October 2015. The existing repurchase program has $529 million outstanding as of January 28th, 2017, and will expire on March 01st, 2017. Nordstrom’s Board of Directors approved a quarterly dividend of $0.37 per share payable on March 15th, 2017, to shareholders of record at the close of business on March 01st, 2017.

Cash flow: Nordstrom generated $1.6 billion in operating cash flow and $0.6 billion in free cash flow in FY16.

Guidance for full year FY17

For FY17, Nordstrom forecasts net sales to increase 3% to 4%, with comparable sales remaining approximately flat. Retail EBIT is forecast at $780 to $840 million, Credit EBIT at approximately $135 million, with diluted EPS at $2.75 to $3.00.

During FY17, Nordstrom plans to open 1 new full-line store and 15 new Nordstrom Rack stores. It also plans to relocate 2 full-line stores and 1 Nordstrom Rack store. Nordstrom plans to operate fewer than 300 Rack stores by 2020.

Stock Performance

Nordstrom’s stock ended the day at $46.35, slipping 0.64%, at the close on Friday, March 03rd, 2017, having vacillated between an intraday high of $46.90 and a low of $45.76 during the session. The stock’s trading volume was at 2,270,376 for the day. The Company’s market cap was at $7.60 billion as of Friday’s close.

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