Nordstrom: Beating the Competition in a Tough Environment

Source: Nordstrom.

Nordstrom (NYSE: JWN  ) rose by 14.7% on Friday after reporting remarkably strong financial performance for the quarter ended on May 3. Even other successful industry players, such as Macy's (NYSE: M  ) and Dillard's (NYSE: DDS  ) , are finding it hard to increase sales in the notoriously challenging retail environment lately, and this says a lot about Nordstrom and its competitive strengths.

Growing revenues and investing for growth
Nordstrom announced net earnings per share of $0.72 during the quarter ended on May 3. This was above the company's own guidance of between $0.60 and $0.70 for the quarter, and also better than the $0.68 per share forecast, on average, by Wall-Street analysts.

Sales during the quarter were particularly impressive; while most competitors are reporting sluggish top-line growth, Nordstrom announced a sales increase of 6.8% versus the same quarter in the prior year, to $2.8 billion. Comparable-store sales increased by a healthy 3.9% during the quarter.

Nordstrom Rack is becoming a considerable growth driver for the company lately. Sales increased by a whopping 20% year over year on the back of 27 new store openings and a jump of 6.4% in Nordstrom Rack same-store sales. Direct sales were also particularly strong during the quarter, with a 33% annual increase.

Gross margin declined by 124 basis points, to 35.8% of sales, though this was due to increased promotions, accelerated store expansion in the Nordstrom Rack division, and growth in the Nordstrom Rewards loyalty program. 

The Nordstrom Rewards program has 3.9 million active members. The company added more than 275,000 accounts during the quarter, an increase of approximately 25% versus the prior year. Sales from members represented 38% of total sales, increasing from 36% in the same period last year.

Management reaffirmed its earnings and sales guidance for the rest of the year, and the company plans to open three full-line stores and 17 Nordstrom Rack stores during the remainder of fiscal 2014.

Online is a key strategic area for Nordstrom when it comes to investments in the years ahead. The company plans to spend $3.9 billion in capital investments during the next five years, and technology will represent approximately $1.2 billion of that money, or 30% of Nordstrom's capital plan.

Even if profit margins are likely to remain under pressure due to new Nordstrom Rack openings and active investments in technology, management is doing the right thing by investing for the future, and positioning the company for growth over the long term.

Nordstrom vs. Macy's and Dillard's
Macy's and Dillard's are among the strongest companies in the business when it comes to performance during the last several years, yet Nordstrom has outgrown them by a considerable margin over time. 

JWN Revenue (TTM) Chart

JWN Revenue (TTM) data by YCharts.

Macy's has traditionally been able to sustain relatively strong financial performance in the face of difficult times for the industry. And the last quarter was no exception: Macy's reported better-than-expected earnings for the quarter ended on May 3, as diluted earnings per share came in at $0.60, a 9% increase versus the prior year and above the $0.59 per share forecast on average by analysts.

The strong performance on the bottom line was due to higher margins and a reduced share count, though. Sales declined by 1.7% versus the same quarter in the prior year on the back of a 0.8% drop in comparable-store sales, including sales from departments licensed to third parties.

Dillard's was another strong performer on Friday, rising by an explosive 14.9% as investors reacted with optimism to the company's earnings report. Dillard's reported earnings per share of $2.56 during the quarter, better than the $2.41 forecast by Wall Street analysts.

Merchandise sales didn't grow by much, though. The company announced a 1% increase in revenues from its retail business, to $1.54 billion, while comparable-store sales increased by 2% during the quarter. Dillard's is doing relatively well in comparison to most competitors, but the company is no match for Nordstrom when it comes to sales growth during the last quarter.

Even for well-run department stores generating solid profitability, sales growth has been remarkably difficult to achieve during the last quarter. Nordstrom's performance looks particularly encouraging when keeping in mind the notoriously tough environment affecting the industry lately.

Foolish takeaway
Nordstrom is delivering strong performance while positioning itself for growth in the years ahead. In times when even solid players such as Macy's and Dillard's are finding it hard to generate sales growth, Nordstrom stands one step ahead of the competition. This speaks wonders about the company's fundamental strengths and management team quality. 

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