Nordstrom Rides the Roller Coaster

High-end apparel has been a mixed bag for investors so far this year. While Michael Kors (NYSE: KORS  ) has done well, Coach (NYSE: COH  ) has had nothing but heartache. So it's no wonder that Nordstrom's (NYSE: JWN  ) earnings came out as being hit-and-miss last Thursday. The retailer kicked its profit up, raising earnings per share by 26% to $1.40. That easily beat out analyst expectations of $1.36 per share, but was overshadowed by the company's weak outlook. Here's what investors need to know.

The quarter in summary
Nordstrom pulled in $3.6 billion in sales in the quarter, a 13.6% increase from the year before. That success came from a solid 6% increase in comparable sales, with men's apparel putting in a big contribution to that growth. The company said that sales were supported by its Fashion Rewards loyalty program, and that the program now has 3 million members, who spend and visit stores more than non-members. That has allowed the company to continue growing sales, even in stores that may not have had room for growth without some extra enticement.

The company also sang the praises of its direct channel, which grew 37% over the fiscal year. Management said that 20% of direct sales now came to it through mobile devices, which hints at customers' growing desire to shop just about everywhere. Nordstrom said that it gets close to 100,000 mobile visits every day to its website. That push clearly helped the company in its final result, as direct sales surpassed $1 billion for the year. Overall, not a bad quarter and not a bad year.

The future ain't quite so bright
After the good news, Nordstrom got down to the not-as-good news. The company is expecting to grow less next year. Comparable sales are planned to be below 5%, which is a meaningful drop from this past year. As a result of the slower growth, earnings per share are expected to grow only 2.5% to 6.5% for the full year. This year, earnings per share were up over 13% for the full year. Part of that pessimism comes from the company's internal desire to keep its inventory and spending in line. Then, if it exceeds its sales targets, it has more flexibility. As an analyst pointed out on the conference call, Nordstrom hasn't had comparable sales grow slower than 5.8% since 2009. I expect that estimate is going to rise as the year progresses.

Nordstrom is also going to be making some investments this year, building 24 new Nordstrom Rack stores. That's an aggressive push, but the brand has had great success. In 2012, comparable sales were up 7.4% at Rack locations, and overall sales grew 20%. Nordstrom is trying to capitalize on that growth, but it's going to cost a decent amount to build out all those locations. Combined with the company's push into Canada, Nordstrom is looking at an additional $20 million to $25 million in costs this coming year.

The bigger picture
Nordstrom is just one of many high-end retailers trying to figure out what resonates with customers in the new economic reality. As mentioned, Coach has been struggling to hit expectations as, in its words, "the consumer [has been] impacted by a muted macroeconomic environment, while in the Women's handbag category competition [has] intensified and promotional activity [has] increased." The key there is determining how much of Coach's shortcomings are economically driven and how much comes from competition.

Kors has been on a yearlong hot streak, and in its last release highlighted that the economy has not been weighing on it. Management said that "despite a continued weak overall European economy," the brand has performed well. That's the kind of talk that comes from a management team that either sees the challenge and knows how to face it, or is simply blind to the problem. Kors seems pretty sure of itself, right now -- I imagine it sees the challenge.

For Nordstrom's part, management was optimistic that consumers aren't going to change much over the next year. When asked if the company was expecting anything new from the macroeconomic environment or consumer behaviors, CFO Michael Koppel said, "There's nothing at this point that would suggest any change in our customers' behavior." I think Nordstrom sees what the market is doing, and as evidenced by its focus on mobile shopping, it has a plan for how to deal with this new economy. Look for good things from Nordstrom this year.

Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's new premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.


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