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Nordstrom (JWN) Q4 Earnings Beat, Reflect Sequential Growth

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Zacks Equity Research
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Nordstrom, Inc. JWN reported fourth-quarter fiscal 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate. However, both the top and bottom lines declined year over year. Despite the decline, the company’s results reflected an improvement on a sequential basis.

Despite the better-than-expected results, shares of Nordstrom declined 2.6% after the close of the trading session on Mar 3. The Zacks Rank #3 (Hold) stock has gained 16.7% in the past three months compared with the industry’s growth of 32.1%.

Q4 Highlights

Nordstrom posted earnings of 21 cents per share, beating the Zacks Consensus Estimate of 13 cents. However, the figure reflected a decline of 82.9% from 81 cents reported in the prior-year quarter. The better-than-expected earnings can be attributed to the positive response to the company’s gifting range, which represented 67% of sales and an improvement of 600 basis points (bps) from the year-ago quarter. Also, overhead cost reductions aided the bottom line.

However, the company’s actions to stock up inventory for the holiday season as well as delays in inventory flow in the reported quarter led to increased markdowns, which affected the bottom line and margins. Higher-than-expected selling and labor expenses, higher freight costs, and SG&A expense rate deleverage partly hurt earnings in the quarter under review.

Total revenues declined nearly 20% year over year to $3,645 million but surpassed the Zacks Consensus Estimate of $3,597 million. Net sales fell 20% to $3,551 million, while Credit Card net revenues declined 5% to $94 million. The better-than-expected top-line performance can be attributed to improved overall trends throughout the reported quarter, with broad-based improvement across the Nordstrom and Nordstrom Rack brands, both in stores and online.

Despite a year-over-year decline, the company’s top line reflected a sequential improvement of 600 bps from third-quarter fiscal 2020, after adjusting for the shift in the Anniversary Sale event. Notably, the company reported strong sequential improvement of 5% and 9%, respectively, at Nordstrom and Nordstrom Rack stores. Nonetheless, net sales for the Nordstrom brand dropped 18.6% year over year to $2,454 million in the fiscal fourth quarter. Sales for the Nordstrom Rack brand declined 22.9% to $1,097 million.

Nordstrom, Inc. Price, Consensus and EPS Surprise

Nordstrom, Inc. Price, Consensus and EPS Surprise
Nordstrom, Inc. Price, Consensus and EPS Surprise

Nordstrom, Inc. price-consensus-eps-surprise-chart | Nordstrom, Inc. Quote

Further, momentum in digital business aided the top line. Notably, digital sales advanced 24% year over year in the reported quarter, surpassing the company’s forecast of a low-twenties percentage decline. Digital sales also represented 54% of Nordstrom’s sales, up from 35% in the year-ago quarter. Additionally, the company has expanded pickup options to 350 stores, including Nordstrom and Rack outlets. Consequently, about 10% of the online orders were picked up from stores in the reported quarter.

Nordstrom's gross profit margin contracted 160 bps to 33% in the reported quarter. The decline mainly stemmed from deleverage from lower sales volume and higher markdowns, offset by planned cost savings.

Ending inventory declined 3% from the last year. The company’s decision to increase receipts ahead of the holidays as well as delayed inventory flows led to higher inventory levels at the year-end. Most of the extra inventory reflected current receipts and non-seasonal merchandise. The company is taking actions to clear excess inventories in the seasonal and underperforming categories.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, increased 470 bps to 35% in the fiscal fourth quarter. The SG&A deleverage was mainly driven by lower sales volume, higher labor and shipping expenses in the holiday season due to COVID-19, partly negated by planned cost savings. Notably, the company benefited from rebasing of cost structure, which resulted in an overhead cost reduction of 15% year over year. For fiscal 2020, the company’s cost savings exceeded its planned $370-$420 million.

EBIT for the reported quarter declined 90% to $30 million. Meanwhile, EBIT margin was 0.8% compared with 6.7% in the year-ago quarter, reflecting a 590-bps decline.

Other Financials

Nordstrom ended fiscal 2020 with cash and cash equivalents of $681 million, long-term debt (net of current liabilities) of $2,769 million, and total shareholders’ equity of $305 million. As of Jan 30, 2021, the company used $348 million of net cash for operating activities and spent $385 million as capital expenditure.

However, the company generated positive operating cash flow for the third straight quarter, with $88 million generated in the fiscal fourth quarter. This resulted in the generation of more than $425 million of operating cash flow in the past three quarters, enabling it to fully pay down its revolving line of credit. Consequently, the company ended fiscal 2020 with a strong balance sheet, having total liquidity of $1.5 billion, including $681 billion in cash.

Fiscal 2021 Outlook

Management remains on track to improve shareholder value through accelerated revenue growth, expanding operating margin, enhancing return on invested capital and generating cash flow. Though the COVID-19 headwinds are likely to persist and there remains uncertainty about the timing of recovery in customer demand, the company outlined its view for fiscal 2021. The guidance assumes that stores will remain open throughout 2021.

The company anticipates total revenue growth of more than 25%, with digital representing about 50% of sales. Driven by expectations of improved gross margin and moderating of cost pressures, it expects EBIT margin of 3% of sales in fiscal 2021. Income tax rate is expected to be 27%.

For the first half of fiscal 2021, the company anticipates EBIT to be nearly breakeven, suggesting 45% of total fiscal 2021 sales. This will take into account the shift of the anniversary sale event starting in July this year, with one week falling into the fiscal third quarter.

3 Stocks to Watch in the Retail Space

Abercrombie & Fitch Company ANF has an expected long-term earnings growth rate of 18% and it currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. BOOT has an expected long-term earnings growth rate of 20% and it flaunts a Zacks Rank #1 at present.

L Brands, Inc. LB has an impressive expected long-term earnings growth rate of 13% and it currently sports a Zacks Rank #1.

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