Nordstrom JWN has been witnessing decelerating demand trends due to reduced consumer spending amid lower income groups, stemming from the tough macroeconomic environment. The company’s fourth-quarter fiscal 2022 results showed reflection of this situation, wherein both the top and bottom lines fell year over year.
Adjusted earnings came in at 74 cents per share, down from the year-ago fiscal quarter’s $1.23. Total revenues of $4,319 million declined 4.1% year over year due to soft holiday sales trends and high promotions. Gross merchandise value declined 4.2% in the quarter. Net sales fell 4.2% year over year to $4,200 million.
Gross profit margin contracted 525 bps year over year to 33.2%, mainly due to higher markdowns. The increased markdowns were the result of the company’s actions to right-size inventory levels in a higher promotional environment.
Earnings before interest and taxes (EBIT) of $187 million declined 37.5% year over year, primarily due to higher markdowns, partly negated by supply-chain expense efficiencies. EBIT margin declined 235 bps to 4.5%.
Going ahead into fiscal 2023, management expects total revenues to decline 4-6% year over year. Revenues are expected to include a 250 bps impact owing to the closing of the Canada operations. Also, this closure is likely to result in a $400 million decline in total revenues.
EBIT margin is expected to be between 1.2% and 2.1% of sales, which includes impacts of the charges related to the Canada-business closure. Adjusted EBIT margin is likely to be in the range of 3.7-4.2% of sales.
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Shares of JWN have lost 8.2% in the past six months against the industry’s growth of 4.8%.
Efforts to Counter Hurdles
Although muted demand and reduced discretionary spending remain looming concerns for Nordstrom, the company is leaving no stone unturned to get back on track. Its efforts to drive efficiency and improve customer experience via faster order fulfillment along with reducing inventory and increased focus on Nordstrom Rack, bode well.
Notably, Nordstrom Rack reduced store-based order fulfillment and raised the minimum order amount for free ship-to-store delivery on rack.com. These actions led to lesser order cancellations, simplified Rack operations and improved profitability.
Going ahead, it continues focusing on introducing more premium brands at Rack, better assortment and increased brand awareness. Driven by these factors, it expects to optimize Rack product mix by mid-2023.
The company remains focused on its long-term strategy, which builds on its market strategy to capitalize on its digital-first platform to better serve customers, gain market share and deliver profitable growth. For this, it is focused on three areas – winning in most important markets, expanding the reach of Nordstrom Rack and enhancing its digital velocity. The company boasts approximately 10 million new customers in 2022 and has now added 2.5 million new Nordy Club members.
Also, this Zacks Rank #3 (Hold) company is on track with expanding efforts and has opened 20 new Rack stores in fiscal 2022. Rack stores continue to be the largest source of new customer acquisition, accounting for more than 40% of newly acquired customers in 2022. In the fiscal fourth quarter, the company expanded its advertising offering to brands and categories adjacent to Nordstrom as well as launched offsite partnerships with TikTok and Pinterest. Management expects to drive greater engagement and higher profitability at nordstromrack.com.
It remains focused on the closer-to-you strategy, which aims to link stores and services to expedite deliveries, expanding online offerings and adding cheaper merchandise at its Rack off-price stores to improve customers' shopping experiences. Increased focus on distribution capabilities along with improved connectivity of physical and digital inventory are likely to contribute to Nordstrom Rack sales by roughly $2 billion in the long-term.
As part of the strategy, Nordstrom earlier issued a long-term outlook. It predicted revenues to grow low single-digits on an annual basis, with operating income likely to outpace revenues in the long term. EBIT margin is expected to be more than 6%, with annual operating cash flow anticipated to be more than $1 billion. Capital expenditure is likely to be between 3% and 4% of sales.
Despite inflation concerns and sluggish demand, Nordstrom is likely to sustain momentum, driven by strong demand, solid online show and long-term growth strategy. Topping it, a VGM Score of A and a long-term earnings growth rate of 5.8% reflect its inherent strength.
Stocks to Consider
Here are some better-ranked stocks you may want to consider, Urban Outfitters URBN, Arhaus ARHS and American Eagle Outfitters AEO.
Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year’s revenues suggests growth of 5% from the year-ago reported figure.
Arhaus, which operates as a lifestyle brand and premium retailer in the home furnishing market, carries a Zacks Rank #2 at present. Its expected EPS growth rate for three to five years is 16.1%.
The Zacks Consensus Estimate for Arhaus’ revenues and EPS suggest growth of 54% and 26.1%, respectively, from the year-ago reported figures. ARHS has a trailing four-quarter earnings surprise of 112%, on average.
American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.
The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year’s sales and EPS suggest growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.
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