Nordstrom Surpasses Earnings Estimates

Zacks

Upscale department store operator, Nordstrom Inc. (JWN) posted fourth-quarter and fiscal 2013 results wherein earnings for both periods surpassed expectations as the company’s customer strategy continued to bear fruit, reflecting growth across channels along with efficient inventory and expense management.

Fourth-quarter earnings of $1.37 per share surged higher than the Zacks Consensus Estimate of $1.33, while it declined 2.1% year over year. Year-over-year comparisons for the quarter were mainly impacted by the inclusion of an additional week in the fourth quarter of fiscal 2012.

For the full-year, the company reported earnings per share of $3.71, higher than the Zacks Consensus Estimate of $3.68 and the company’s forecasted range of $3.65 to $3.70. Moreover, earnings escalated 4.2% from the year-ago earnings of $3.56 per share.

Total Revenue

Total revenue of $3,711 million in the quarter remained almost flat with the prior-year quarter, reflecting only a marginal 0.4% increase. Quarterly revenue also surpassed the Zacks Consensus Estimate of $3,705 million. The marginal improvement stemmed from near-to-flat Net Retail sales to $3,614 million and a 4.9% decline in Credit Card revenues to $97 million. Notably, sales trends in the quarter remained consistent with the trends witnessed through fiscal 2013.

Fiscal 2013 total revenue rose 3.3% to $12,540 million, while it surpassed the Zacks Consensus Estimate of $12,480 million.

Total comparable store sales (comps) improved 2.6% in the quarter against a gain of 6.3% in the year-ago quarter. The company registered a 3.3% decline at its full-line stores, while comps at Nordstrom Rack increased 3.6%. Moreover, the company reported comps gain of 30% each for its Direct and HauteLook businesses. Nordstrom Rack net sales rose 10.2% benefiting from about 22 new Rack stores opened in fiscal 2013.

Additionally, Nordstrom's comps (including full-line and direct businesses) rose 2.2% in the quarter, as against 6.1% rise in the year-ago comparable period. Outperforming categories in the quarter included Cosmetics, Accessories, and Men’s Shoes, while the company also saw momentum in the Women’s Apparel category.

Q4 Operational Update

Gross profit in the quarter declined 1.2% year over year to $1,442 million. However, due to increased markdowns resulting from highly promotional environment during the holiday season and higher occupancy costs related to the expansion of Rack Stores, Nordstrom's gross profit margin in the retail segment contracted 55 basis points (bps) to 38.9%.

Total selling, general and administrative (SG&A) expenses dipped 0.6% to $955 million in the quarter. As a percentage of sales, it decreased 30 bps primarily due to reduced selling expenses, offset by increased investments in growth projects pertaining to the company’s entry in Canada and for expansion of Rack stores.

Nordstrom's operating income decreased nearly 2.2% to $487 million compared with $498 million in the prior-year period. Moreover, operating margin contracted 40 bps to 13.1% primarily due to lower gross margin offset by lesser SG&A expenses as a percentage of sales.

Balance Sheet and Cash Flow

Nordstrom ended the year with cash and cash equivalents of $1,194 million compared with $1,285 million at the end of the prior year. Long-term debt net of current liabilities was $3,106 million versus $3,124 million in the prior-year period. During fiscal 2013, Nordstrom generated $1,320 million in cash from operations.

Capital expenditures for the fiscal year were $803 million. During the quarter, the company bought back nearly 2.5 million shares for about $154 million. Currently, Nordstrom has about $670 million worth of shares remaining under its existing share repurchase authorization.

Store Update

During fiscal 2013, the company opened 20 new Rack and other stores, expanding the total company store count to 260 as against 240 at the end of fiscal 2012.

Looking into fiscal 2014, Nordstrom plans to further expand its store base with the opening of 30 new stores throughout the year, including 3 full-line stores and 27 Rack stores. Moreover, the company will continue to find opportunities for further integration with HauteLook in fiscal 2014.

Guidance

Following the mixed year-end results, Nordstrom provided its expectations for fiscal 2014, anticipating continued investments for delivering sustainable sales, earnings and ROIC growth.

Nordstrom expects total sales to increase by 5.5% - 7.5% and comps to rise in the range of 2% - 4% in fiscal 2014. Further, gross margin is expected to contract 10–30 bps year over year. Management projects SG&A expenses, as a percentage of sales, to rise 10 to 30 bps. Further, the company expects interest expenses to decline $25 million in fiscal 2014. Tax rate is expected to be about 39.0%.

Nordstrom expects fiscal 2014 earnings to come in the range of $3.75–$3.90 per share, assuming shares outstanding of nearly 196 million. However, the company expects the ongoing infrastructure investments and pre-opening costs related to its entry into Canada to lower earnings throughout fiscal 2014.

The company projects loss before interest and taxes of $35 million for Canada in fiscal 2014 compared with a loss of $14 million incurred in fiscal 2013.

Additionally, the company estimates the Canadian venture along with its expansion plans for Rack stores will raise depreciation and rent expenses in fiscal 2014. As a result, the company projects depreciation and amortization of nearly $514 million in fiscal 2014, representing 13% growth from the fiscal 2013 level. Rent expenses for fiscal 2014 are expected to rise 17% from the fiscal 2013 level to $147 million.

Nordstrom also came up with projections for the first quarter of fiscal 2014, anticipating earnings per share in the range of 60 – 70 cents, with sales expected to increase in the 3.5%- 5.5% range.

Other Stocks to Consider

Nordstrom currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the apparel and shoe space include Christopher & Banks Corporation (CBK), Francesca's Holdings Corporation (FRAN) and Finish Line Inc. (FINL). While Christopher & Banks sports a Zacks Rank #1 (Strong Buy), Francesca's Holdings and Finish Line hold a Zacks Rank #2 (Buy).

Read the Full Research Report on JWN
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Read the Full Research Report on CBK


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