Please ensure Javascript is enabled for purposes of website accessibility

Why Nordstrom Investors Are More Worried Than Ever

By Dan Caplinger – Updated Aug 16, 2018 at 5:02PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The high-end department store retailer is seeing slowing growth as it deals with an uncertain future.

Nordstrom (JWN 0.20%) has suffered along with much of the rest of the retail industry for quite a while now, as changes in the ways shoppers like to shop have forced companies across the sector to adapt their business practices and adopt new technologies. Some had hoped that the upscale Seattle-based retailer would prove immune to those trends, but Nordstrom hasn't escaped the resulting downward pressure. Now that it seems unlikely that the Nordstrom family will succeed in pulling off a leveraged buyout of the retailer, shareholders want to feel more confident about the future direction the company will take, especially as competitors have started to show signs of a recovery.

Coming into Thursday's first-quarter financial report, Nordstrom investors wanted to see a nice bounce from what had been a somewhat mixed performance to close 2017. Nordstrom's results were solid, but key elements were weak enough to sustain concerns about whether the retailer can keep up with competitors and find a path toward a more complete recovery.

Nordstrom storefront with shoppers walking in front and diners at a balcony cafe above the entrance.

Image source: Nordstrom.

How Nordstrom started 2018

Nordstrom's first-quarter results were reasonably good in most investors' eyes. Net sales were up 6% to $3.56 billion, which was about double the growth rate that those following the stock were looking to see. Net income climbed 38% to $87 million, and that produced earnings of $0.51 per share, topping the consensus forecast for $0.43 per share on the bottom line.

Yet Nordstrom wasn't able to impress its followers in every fundamental aspect of its business. Comparable sales were up just 0.6% during the quarter, slowing by two full percentage points over the past three months. The company said part of the reason for the disparity between overall sales growth and its comps came from the fact that it shifted a Nordstrom Rewards loyalty event into the first quarter of the current year, which could potentially cause a downward impact when the retailer reports its current-quarter results three months from now.

Interestingly, there was a shift in the relative performance of Nordstrom's two key segments. The full-line Nordstrom brand posted comparable sales gains of 0.7%, with kids' apparel and men's apparel leading the charge higher. Yet the off-price segment, which includes Nordstrom Rack and Last Chance clearance stores, only managed to post comparable sales growth of 0.4%. Traditionally, Nordstrom has seen better gains from its off-price stores, so the shift in consumer demand is a bit of a surprise for those following the retailer.

Nordstrom reported some mixed fundamental performance. On one hand, higher occupancy costs weighed on gross profit, and pre-opening expenses related to its Men's Store NYC flagship sent overhead expenses slightly higher as a percentage of total revenue as well. Yet the retailer said it finished the quarter in a good position with its inventory.

The elephant in the room

To bolster growth, Nordstrom has continued its expansion plans. The company opened eight stores to start the year, including the NYC Men's Store and seven Nordstrom Rack locations in the U.S. and Canada. In a strategic shift, Nordstrom included the three Nordstrom Rack stores in Toronto and Calgary in its full-price category in its press release, even though most of the retailer's promotion stresses the off-price nature of the actual stores. Further expansion in the Canadian market is expected during the remainder of the fiscal year.

Yet neither the press release nor the conference call directly addressed what now seems to be the Nordstrom family's scuttled leveraged buyout plans. Instead, Nordstrom talked about the refocus of its strategic efforts. The company continues to expand its digital capabilities, integrating digital and brick-and-mortar assets to serve customers as effectively as possible. The key Los Angeles market, which is Nordstrom's largest, will be a testing ground from which the retailer hopes to learn lessons it can apply across its store network.

Nordstrom made only minor moves with its guidance, boosting the lower end of its pre-tax profit range by $10 million. Current projections for earnings of between $3.35 and $3.55 per share represented a $0.05 per share bump to the bottom part of the range. Yet Nordstrom still sees comps growing just 0.5% to 1.5%.

Nordstrom investors seemed nervous in general about the report, and the stock fell 8% in pre-market trading Friday following the Thursday afternoon announcement. Without clearer direction about how Nordstrom can boost its growth back to levels that long-term shareholders are used to seeing, it's going to be difficult to give investors the confidence they want going forward.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.