Nordstrom (NYSE:JWN) stock has lost more than 20% of its value since early December, because of mounting worries about the health of its full-line department stores. However, investors breathed a sigh of relief on Thursday afternoon, as the trendy retailer reported better-than-expected fourth-quarter earnings.

Nordstrom's Q4 performance showed that it's finally getting its costs under control. But to make a full recovery, Nordstrom will need to get revenue growing faster. Thus far, it has made less progress on that front.

Mixed trends continue

Last quarter, Nordstrom posted a 2.4% year-over-year revenue increase on a 0.9% decline in comparable-store sales. E-commerce continued to be the main driver of growth. Online sales increased 8% on the Nordstrom.com site and 29.2% (albeit from a smaller base) for the company's off-price business.

By contrast, comparable-store sales plunged 6.8% in Nordstrom's full-line stores, which was roughly in line with the trends it experienced throughout 2016. Nordstrom Rack stores posted a far more respectable performance, with comp sales down 0.5% year over year.

A rendering of a Nordstrom full-line store

Sales in Nordstrom's full-line stores plummeted in 2016. Image source: Nordstrom.

In total, sales declined 2.8% in the domestic full-price business during Q4, while off-price sales rose 10.7%.

Better inventory management allowed Nordstrom to increase its gross margin by more than 1 percentage point last quarter. Meanwhile, Nordstrom finally succeeded in curbing its expense growth during 2016. As a result, adjusted earnings per share reached $1.37 in Q4 -- or $1.27, excluding a one-time gain related to a legal settlement -- up from $1.17 a year earlier. This showing easily beat the company's most recent guidance.

Full-line stores are still struggling

Nordstrom's initial 2017 forecast calls for EPS of $2.75-$3.00, which would be down modestly on a year-over-year basis despite a projected 3%-4% sales increase. In other words, the company expects its profit margin to decrease once again.

This expected margin pressure comes even as Nordstrom's losses related to growth initiatives are finally subsiding. Instead, the margin compression is being driven by steep sales declines in Nordstrom's full-line stores.

Nordstrom has some of the best-located stores of any department-store chain. The company is also working to differentiate its stores with exclusive and limited-distribution merchandise. Yet in-store sales are still falling at an alarming rate. Unless this trend is reversed, it will inevitably lead to margin erosion as lower sales make it harder for Nordstrom to cover its fixed costs.

Nordstrom Rack hasn't reached its full potential

The Nordstrom Rack chain has a far brighter future. Indeed, off-price pioneer TJX (NYSE:TJX) has demonstrated that off-price merchants are better able to cope with the threats currently facing fashion retailers than traditional department stores.

The outside of a Nordstrom Rack store

The Rack chain is Nordstrom's largest growth opportunity. Image source: Nordstrom.

Various news outlets noted that Nordstrom's strong off-price revenue growth stands in stark contrast to its shrinking full-price business. Yet while off-price was a relative bright spot for Nordstrom in Q4 and 2016 as a whole, Nordstrom Rack is still no TJX.

TJX posted 5% comp sales growth last year, roughly in line with its recent trend. That might not seem much different than Nordstrom's 4.5% full-year off-price comp sales growth. However, TJX excludes e-commerce from its comp sales calculations. Looking just at in-store sales, Nordstrom Rack posted a measly 0.2% comp sales increase in fiscal 2016.

The distinction between in-store sales and e-commerce sales is crucial. Nordstrom's off-price e-commerce business is still barely breaking even, although profitability has been improving gradually. By contrast, TJX has a pre-tax margin of more than 11%.

Nordstrom doesn't break out profitability for its Rack stores specifically. But the company's declining margin over the past few years suggest that Nordstrom Rack probably isn't as profitable as TJX. The Rack chain has big sales and earnings growth potential if the company can execute better -- but right now it isn't performing as well as it should.

Can Nordstrom turn the corner?

If there's one clear positive that investors can take from Nordstrom's Q4 earnings report, it's that the company ended fiscal 2016 with inventory down 2.5% year over year. With lower inventory levels to start the new year, Nordstrom should be able to bring fresh merchandise into its stores at a steady pace during 2017.

Thus, Nordstrom is in a much better position to dazzle customers with new items on its shelves than has been the case in recent years. Of course, there's no guarantee that this will provide the spark necessary to stabilize the company's sales and earnings trends -- but it's a good start. 

Adam Levine-Weinberg owns shares of Nordstrom and is long January 2018 $60 calls on The TJX Companies and short January 2018 $90 calls on The TJX Companies. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.