Did Nordstrom Turn the Tide with Its Q3 Earnings?

Nordstrom’s (JWN) strong third-quarter earnings drove a 10.6% rise in its stock on November 22. The company announced its third-quarter results after the financial markets closed on November 21. Nordstrom’s third-quarter EPS rose 20.9% YoY (year-over-year) to $0.81 compared to its adjusted EPS of $0.67 in the third quarter of fiscal 2018. Analysts expected an EPS of $0.64. 

Nordstrom’s earnings growth was in sharp contrast to Macy’s (M) and Kohl’s (KSS). Dismal sales and lower margins dragged down Macy’s third-quarter adjusted EPS by 74.1% to $0.07. Kohl’s third-quarter adjusted EPS fell 24.5% to $0.74 due to pressure on its margins.

What drove Nordstrom’s earnings

Higher margins helped drive Nordstrom’s earnings growth. The gross margin expanded by 100 basis points YoY to 34.3%. Effective inventory management enabled fewer markdowns in the off-price business. Also, a higher merchandise margin due to lower markdowns on anniversary products in the full-price business boosted the gross margin.

Expense discipline helped increase the operating margin to 5.4% compared to 2.9% in the third quarter of fiscal 2018. Nordstrom is reducing its fixed costs by realigning its support structure in stores, improving its supply chain, and reducing discretionary spending. Excluding a one-time credit-related charge recorded last year, the company’s operating margin expanded by 50 basis points on an adjusted basis.

The company delivered cost savings of $170 million in the first nine months of fiscal 2019. Nordstrom expects to generate higher cost savings than the planned range of $150 million–$200 million in fiscal 2019.

Nordstrom’s third-quarter earnings also benefitted from a lower share count due to share repurchases.

How Nordstrom’s top line fared

Nordstrom’s overall revenues (sales plus Nordstrom credit card revenues) fell 2.0% YoY to $3.67 billion. The revenues were in line with analysts’ expectations. Nordstrom’s sales fell 2.2% to $3.57 billion, while the credit card revenues grew 6% to $106 million.

Weakness in the company’s full-price business continued. The sales fell 4.1% to $2.27 billion. Meanwhile, the off-price business sales grew 1.2% to $1.30 billion. The company’s digital sales rose 7%. Digital sales accounted for 34% of the overall sales in the third quarter compared to 31% in the third quarter of fiscal 2018.

Analysts reacted to the improved outlook

Nordstrom still expects a 2% decline in its fiscal 2019 sales. The company expects a mid-single-digit rise in its credit card revenues compared to the previous outlook of low to mid-single-digit growth. Also, Nordstrom expects the fiscal 2019 operating margin to be 5.4%–5.6% compared to the previous forecast of 5.3%–5.6%.

Nordstrom expects it’s fiscal 2019 EPS to be $3.30–$3.50 compared to the previous prediction of $3.25–$3.50.

Some analysts raised their target price for Nordstrom stock following the updated earnings guidance. Cowen and Company increased its target price to $37 from $35. Citigroup raised its target price to $36 from $32. Telsey Advisory Group revised its target price estimate to $40 from $32, while Barclays increased its target price to $38 from $36.

So far, Nordstrom stock has fallen 18.6% YTD (year-to-date). On average, analysts expect an additional downside of 5% in the stock over the next 12 months to $36.00. Macy’s and Kohl’s stocks have fallen 48.2% and 29.2% in 2019. The stocks have underperformed the S&P 500, which has risen 24.1% YTD.

Currently, 15 out of 21 analysts have a “hold” recommendation for Nordstrom stock. Two analysts have a “buy” rating, while analysts have a “sell” rating. The company expects the New York City flagship store to drive its fourth-quarter sales by 150 basis points. Also, continued improvement in the off-price channel, an enhanced merchandise assortment, digital marketing, and the loyalty program could lift Nordstrom’s fourth-quarter performance.