As the discount retail chains battle on pricing, Nordstrom (JWN) has won praise from Wall Street players during recent months for its position in the luxury department store industry. But some investors might have gotten a little ahead of themselves this time. The market was disappointed Feb. 27 with Nordstrom's stronger profit and sales during the three month period ended Feb. 3.
Nordstrom had net earnings of $232.3 million during the fiscal 2007 fourth quarter, compared to $190.4 million during the same period last year. Total sales rose 14.6% to $2.6 billion during the quarter, with sales at stores open more than a year gaining 8.3%. The Seattle retailer noted "strong sales momentum primarily due to the company's improved execution of its merchandising strategy," in its press release late Feb. 26. "The company continues to focus on providing customers with compelling merchandise and service," Nordstrom said.
Department-store chains have long suffered slow growth and faced tough competition on pricing from discounters like Wal-Mart (WMT) and Target (TGT) as well as warehouse clubs like Costco (COST). But so far Nordstrom has managed to stay relatively above the fray by targeting the well-to-do customers that spurn Wal-Mart and its kind for stores that sell more expensive T-shirts. Nordstrom has even carved out a niche for itself between high luxury chains like Nieman Marcus and mid-tier chains like Federated Department Stores' (FD) Macy's, as Morningstar pointed out in a research note Nov. 11.
"Despite a crowded and highly competitive retail environment, Nordstrom has broken away from the pack by offering exceptional service and 'affordable luxury' goods," Morningstar analyst Kimberly Picciola said in a research note Nov. 11. "We like Nordstrom's positioning and expect continued growth from this retailer as it expands its store base in new and existing markets over the next five years."
But investors were expecting just a little too much this time. The consensus estimate had been for 90 cents per share earned during the quarter, while the company ended up posting 89 cents per share instead. Nordstrom says that it ended up paying employees more than planned because of performance-based incentive compensation driven by goals for total year results and share price appreciation.
Investors sold the company's stock 5.2% to $53.66 per share in early trading on the New York Stock Exchange Feb. 27. Nordstrom's stock has gotten a lot more expensive since its low of the year at $31.77 on July 18.
Nordstrom is taking steps toward further growth. For example, the retailer opened a new store at Grand Plaza in San Marcos, Calif., on November 16. In 2007 the company plans to open more stores in Natick, Mass., Novi, Mich., Denver and Tukwila, Wash. Now Nordstrom is expecting its sales at stores open more than a year to grow by 3% to 4% during 2007 and to have earnings per share ranging between $2.78 and $2.84. During the first quarter of the year, it says sales will grow by the mid-single digits and EPS will range between 51 cents and 54 cents, including one time items.
"We see JWN's sharpened merchandising skills sustaining strong regular price sales across all major merchandise categories in" the fiscal year ended Jan. 2008, Standard & Poor's equity analyst Jason Asaeda said in a research note. But Asaeda is also expecting the company to have expenses related to things like its planned store openings and cut S&P's estimate on Nordstrom's earnings per share in fiscal year 2008. That brought S&P's 12-month target price down by $3 to $60 per share. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)
Meanwhile Nordstrom's rivals have been battling their own issues. Federated, for example, has been rearranging its business after acquiring the May Co. in August 2005. Even so the Cincinnati department store chain, which owns Bloomingdale's as well as Macy's, said Feb. 27 that its net income rose 4.9% year over year to $733 million during the fourth quarter. The company wants to change its name this June to Macy's Group, Inc. and also announced a plan buy back an additional $4 billion of its shares. But investors bid up Federated's stock only 0.7% to $44.51 per share in midday trading on the New York Stock Exchange Feb. 27 as investor sentiment soured on the retail industry in general.