There Is Still Time to Go Upscale

Nordstrom shows progress on investments as Kohl's and Macy's top lines struggle.

May 27, 2014 at 5:26PM

It has been a little rough being bullish on Nordstrom (NYSE:JWN). There have been a few quarterly earnings reports that required looking past the numbers. However, if investors were able to do so, they would have seen positive items as the company is going through a transitional period.

Although the latest report continued to show a company that is evolving, it looks like investors are finally tuning in to the positive developments. However, you should not fret if you did not pick up some shares. The luxury retailer still offers opportunity as it wages a battle with fellow department-store operators Macy's (NYSE:M) and Kohl's (NYSE:KSS).

A growth story
First-quarter sales were up 6.8% from the year-ago period to $2.8 billion. Meanwhile, comparable-store sales accelerated to a 3.3% increase versus a 3.1% rise in the year-ago period. This is an important metric since it strips out new store openings and includes the company's full-line and direct businesses. The latter, one of its growth initiatives, continues to be a strong performer as the company increases its online merchandise offering and invests in technology for shopping ease.

Sales in direct rose 33%, on top of last year's 25% increase. Its full-line stores remained soft with a 1.9% decrease. However, Nordstrom is taking steps to improve this portion of its business by focusing on its products and services. It remains to be seen if these will pay off; however, its credit card business, through its Nordstrom Rewards program, is an important component in deepening existing customer relationships and forging new ones.

Nordstrom Rack, the company's outlet-store concept, is a second growth initiative. In more good news, this business also continues to experience improving results. The company continues to expand as it opened an additional 27 stores during the quarter. Comparable sales popped 6.4%.

The company plans to enter Canada in a third major growth initiative. This has raised expenses as it builds its presence there and takes on the associated infrastructure and pre-opening costs. This is a new area for the company and it will take time to establish the brand there, but it has a successful blueprint to follow.

Earnings were suppressed due to these investments for future growth. Still, earnings were only down 3.4%, or $5 million, to $140 million. However, the company generated enough free cash flow to spend $207 million to repurchase its shares and this reduced the diluted share count by 6.3 million. Therefore, diluted earnings per share only fell by $0.01 to $0.72.

For this year, management expects a decent 2%-4% rise in comparable sales and diluted earnings per share of $3.75-$3.90; this is a respectable 1%-5% increase year-over-year, considering that the company is boosting spending on the aforementioned initiatives.

Competitors lag behind
Meanwhile, competitor Kohl's is not faring nearly as well. Total sales were down 3.1% to $4.07 billion, and comparable-store sales fell 3.4%, worse than the 1.9% decline in the year-ago period. The bottom line dropped even more, by 15%, to $125 million. Diluted earnings per share was helped by share buybacks, but that still fell by 9% to $0.60.

It is hard to imagine how Kohl's will revamp growth. The retailer has 1,160 stores in 49 states. It appears to have the domestic market blanketed.

Macy's top line fell by 1.7% to $6.28 billion, and comparable-store sales were down 1.6%. Cost-cutting and share buybacks helped boost diluted earnings per share by 9.1% to $0.60. However, this cannot last forever, and the retailer will have to grow its top line in order to achieve bottom-line gains.

Final thoughts
Nordstrom's stock price had a nice bump after the latest earnings report. However, it still trades at a trailing P/E of 18 times, which is not overly expensive. It also has a 2% dividend yield. The company has been steadily increasing its dividend, aside from its share buybacks. Earlier this year, the board of directors raised the payout by 10% to a quarterly rate of $0.33 per share. The company has made this a habit, since the dividend has been increased every year since 2006.

Quality companies that have the ability to invest in the future and return cash are rare breeds. The shares may not be in the bargain bin, but investors should still think about grabbing them.

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Lawrence Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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