Nordstrom Reports Strong Q2 Earnings, Stock Surges

Nordstrom (JWN) stock was up 16% as of 11:50 AM today after it reported better-than-expected earnings for the second quarter of fiscal 2019, which ended on August 3. Nordstrom’s adjusted EPS of $0.90 significantly exceeded analysts’ forecast of $0.75. However, its adjusted EPS fell 5.3% year-over-year due to lower revenue and contraction in its margins.

Nordstrom’s revenue (including net sales and credit card revenue) fell 4.8% to $3.87 billion. The company’s second-quarter top line lagged analysts’ expectation of $3.93 billion. Its net sales fell 5.1% to $3.78 billion as its full-price sales fell 6.5%. Sales from the company’s off-price channel fell 1.9%.

A challenging start to the quarter, the soft performance of its anniversary sale event, and the worse-than-expected performance of its off-price business dragged on Nordstrom’s revenue. The company’s online sales rose 4.0% and accounted for 30% of its overall business.

Nordstrom’s gross margin contracted 50 basis points to 34.5% as its occupancy expenses deleveraged on lower sales. The company’s operating margin contracted 47 basis points to 5.7%.

Peer comparison

Nordstrom’s net sales decline was worse than Macy’s (M) and Kohl’s (KSS). Macy’s net sales fell 0.5% to $5.55 billion. Kohl’s sales fell 3.3% to $4.17 billion. JCPenney’s struggles continued in the second quarter. Its sales dropped 9.2% to $2.51 billion.

Overall, the lower sales of Nordstrom and its peers reflect the impact of online retailers’ growing prominence in the retail sector. Off-price retailers such as TJX Companies are making matters worse for department stores by attracting customers with bargains.

Nordstrom’s bleak outlook

Nordstrom revised its EPS guidance for fiscal 2019 to the range of $3.25–$3.50 compared to its previous outlook of $3.25–$3.65. The company now expects its fiscal 2019 sales to fall by about 2%. It previously expected fiscal 2019 sales growth in the range of -2.0%–0.0%.

The company’s guidance doesn’t take into account the impact of tariffs. However, Nordstrom believes that the impact of tariffs will be relatively immaterial in fiscal 2019.

Nordstrom is increasing its marketing efforts and making strategic inventory investments to improve its off-price business in the second half of fiscal 2019. Efficient inventory management helped the company reduce its inventory by 6.5% in the second quarter.

The company continues to drive efficiency measures in its operations to improve profitability. Its efforts to realign its support structure, improve its supply chain, and reduce its discretionary spending helped it generate savings of $100 million in the second quarter. The company is now ahead of its goal to deliver annual savings of $150 million–$200 million. Nordstrom expects its fourth-quarter sales to benefit from the opening of its women’s flagship department store in New York on October 24.

As of August 21, Nordstrom stock was down 43.1% on a YTD (year-to-date) basis. The stocks of Macy’s, Kohl’s and JCPenney were down 48.4%, 29.1%, and 42.2%, respectively, YTD as of yesterday.