Nordstrom (JWN) Stock Drops 5.7% on Q2 Loss & Sales Miss
Nordstrom, Inc. JWN reported dismal second-quarter fiscal 2020 results, wherein the loss per share was wider than expected and sales missed the Zacks Consensus Estimate. Results continued to reflect the impacts of temporary store closures due to the pandemic. However, improved merchandise margins and a nearly 20% reduction in overhead costs were the key highlights of the quarter.
Following the dismal results, the company’s shares declined 5.7% in the after-hours trading session yesterday. In the past three months, this Zacks Rank #4 (Sell) stock has plunged 20.9% against the industry’s growth of 21.7%.
Notably, the company adopted measures to reduce inventory in the fiscal first quarter, citing the adverse impacts of store closures. This resulted in more than 25% inventory reduction to overcome the markdowns on seasonal inventory and bring in newness for customers. Moreover, these actions led to an improved merchandise margin trend, which not only increased sequentially in the fiscal second quarter but also exceeded management’s expectations.
In preparation for its one-of-a-kind Anniversary Sale, which began for Nordy Club customers on Aug 4 and all customers on Aug 19, Nordstrom witnessed accelerated inventory receipts in July. The results of the Anniversary sales have been in line with the company’s expectations so far and reflect an improvement in underlying sales trends compared with July.
Additionally, it is on track with its planned expense reduction of $200-$250 million for fiscal 2020. Moreover, it tracks ahead of the target of $500 million in annual cash savings, net of COVID-19-related charges, driven by strong execution of its plans to create a leaner and more efficient organization. This led to a nearly 20% reduction in overhead costs in the fiscal second quarter.
Looking ahead, the company expects to deliver improved sales trends in the second half of fiscal 2020 and beyond. Moreover, it is optimistic about its inventory levels, which are current and on trend. It remains focused on boosting relevant categories, brands and trends to meet customers’ changing preferences.
Q2 Highlights
Nordstrom posted an adjusted loss of $1.62 per share against earnings of 90 cents in the year-ago quarter. The loss was also wider than the Zacks Consensus Estimate of a loss of $1.47. Loss per share in the quarter included nearly 8 cents of charges related to the pandemic.
Nonetheless, the company’s bottom line was better than expectations. Results were aided by improved merchandise margins and overhead cost reductions of nearly 20%.
Nordstrom, Inc. Price, Consensus and EPS Surprise
Nordstrom, Inc. price-consensus-eps-surprise-chart | Nordstrom, Inc. Quote
Total revenues declined 51.9% to $1,862 million, while net sales fell 53% to $1,778 million. The Zacks Consensus Estimate for sales was pegged at $2,323.3 million. The pandemic-related temporary store closures for nearly half of the days in the reported quarter hurt sales to a large extent. Additionally, the company’s sales reflected nearly 10 percentage points of negative impact from the shift of the Nordstrom Anniversary Sale into the fiscal third quarter this year from the second quarter in the prior-year quarter. Apart from these, the company’s Credit Card net revenues moved down 10.61% to $84 million.
Nordstrom’s full-price net sales (including the U.S. full-line stores, Nordstrom.com, the Canadian operation, Trunk Club, Jeffrey and Nordstrom Local) declined 58% to $1,066 million in the fiscal second quarter. Excluding the Anniversary Sale event shift impact, full-Price sales declined in the mid-forties. Nordstrom’s off-price net sales (including Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores) slumped 43% to $712 million. However, the company’s results in both full-Price and off-Price stores were partly cushioned by gains in some merchandise categories, including home, kidswear, accessories, beauty and activewear.
Digital sales declined 5% in the reported quarter, driven by the Anniversary shift. Nonetheless, digital sales represented 61% of the company’s business, up from 30% in the year-ago quarter. Excluding the Anniversary Sale event shift impact, digital sales increased nearly 20% in the fiscal second quarter. The company’s e-commerce business witnessed more than 50% growth in new customers in the reported quarter.
Operational Update
Nordstrom's gross profit margin contracted significantly to 21% from 35% in the prior-year quarter. This downside was due to planned markdowns in a bid to clear inventory and soft sales volume. However, gross margin reflected some gains from sequential improvement in merchandise margin trends. Ending inventory declined 24% from the last year. Excluding the Anniversary Sale event shift impact, the decline in inventory was in line with the fall in sales.
Selling, general and administrative (SG&A) expenses, as a percentage of sales, grew significantly to 47% from 31% in the year-ago quarter. Excluding charges related to the COVID-19 outbreak, expenses fell nearly 33% during the quarter under review on lower sales volume despite a 20% reduction in overhead costs.
Further, the loss before interest and taxes for the reported quarter was $370 million against earnings before interest and taxes (EBIT) of $216 million due to a decline in sales volume as a result of temporary store closures and pre-tax charges of $23 million related to the COVID-19 outbreak.
Other Financials
Nordstrom ended the quarter with cash and cash equivalents of $991 million, long-term debt (net of current liabilities) of $3,266 million, and total shareholders’ equity of $174 million.
The company used $591 million of net cash from operating activities and spent $228 million as capital expenditure in the first half of fiscal 2020.
However, it generated an operating cash flow of more than $180 million in second-quarter fiscal 2020. This enabled the company to pay down $300 million on its revolving line of credit. Consequently, the company ended the quarter with a strong balance sheet, having total liquidity of $1.3 billion, including $1 billion in cash. Further, it realigned inventory levels and reduced overhead expenses by nearly 20%.
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