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Earnings Preview: Any Signs of Life at Nordstrom?

By Adam Levine-Weinberg – Aug 20, 2019 at 7:18AM

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Shares of the fashion retail giant have fallen out of style over the past year, but investors may be underestimating Nordstrom's long-term earnings potential.

What a difference a year makes. At this time in 2018, Nordstrom (JWN -2.23%) was riding high following an excellent second-quarter performance. Nordstrom reported a 4% increase in comparable-store sales for that period -- with similar gains in the full-price and off-price sides of its business -- and raised its full-year guidance. That sent Nordstrom stock soaring to a multiyear high around $65 last fall.

Nordstrom stock has lost more than half of its value since then. The company reported subpar results for the final quarter of fiscal 2018, and its performance deteriorated even further in the first quarter of fiscal 2019. As a result, investors are dreading its upcoming earnings report.

JWN Chart

Nordstrom Stock Performance, data by YCharts.

Management warned investors not to expect a sharp recovery in sales and earnings trends in the second quarter. Nevertheless, any signs of progress would be welcome news.

What went wrong and what Nordstrom is doing to improve

Nordstrom's sales fell 3.5% year over year in the first quarter, consisting of a 5.1% drop for its full-price business along with a more moderate 0.6% sales decline in its off-price business. For comparison, full-year comparable sales rose 1.7% in fiscal 2018, driven primarily by a 3.5% increase for Nordstrom's off-price division.

Nordstrom traced its underperformance during the first quarter to three key factors. First, the company's reboot of its loyalty program in an all-digital format unexpectedly hurt customer traffic. Second, Nordstrom cut back on digital marketing during the quarter, having expected the loyalty program changes to boost traffic. This added to the pressure on its top line. Third, the upscale retailer made some mistakes with its merchandise mix.

Addressing the first two issues was fairly straightforward. Nordstrom has resumed mailing paper reward certificates to members of its loyalty program. It has also ramped up its digital marketing spending again. Fixing the merchandise mix issues will take longer, due to long lead times for some inventory purchases, but Nordstrom has been working hard on this issue for months.

The entrance to a Nordstrom Rack store, with a full-line Nordstrom store in the background.

Nordstrom is working to correct the mistakes that hurt it during the first quarter. Image source: Nordstrom.

Nordstrom is also targeting more aggressive cost reductions to offset the bottom-line impact of its revenue weakness. Finally, the company is on track to close at least seven underperforming full-line stores this year, as it focuses on growing sales in its best stores and its top markets.

Trends could already be improving

The recent carnage in the retail sector suggests that investors shouldn't expect too much from Nordstrom's second-quarter report, which will be released on Wednesday afternoon. That said, there's a good chance that sales trends started to improve last quarter.

First, Nordstrom made the necessary adjustments to its loyalty program and marketing months ago. Second, Nordstrom's Anniversary Sale -- which ran near the end of the quarter -- tends to generate a lot of buzz and likely rejuvenated traffic to the company's full-line stores and website. Third, Nordstrom entered the second quarter with inventory down year over year, which should have enabled it to bring in fresh, more-desirable merchandise during the quarter.

Expectations are quite low for Nordstrom's earnings report. Analysts are calling for revenue to decline 3.3% year over year to $3.93 billion and for EPS to plunge 21% year over year to $0.75. Thus, investors may react positively to any sign that results are starting to improve.

More catalysts coming soon

Nordstrom's merchandise-mix changes and cost-cutting initiatives should gain more traction in the next quarter or two, contributing to better top- and bottom-line results. Moreover, the retailer will open its long-awaited Manhattan flagship store in October. The new store should soon start churning out substantial profits, after years of being a cost center.

Nordstrom also expects the presence of this store -- as well as two new Nordstrom Local service hubs in other Manhattan neighborhoods -- to boost its e-commerce sales in New York City. That represents another catalyst for sales and earnings growth.

In addition, Nordstrom expects losses to moderate over the next few years for the other long-term growth initiatives it has been pursuing. Share buybacks will accelerate EPS growth, too, particularly because Nordstrom stock is currently trading at a dirt cheap valuation. All of these factors suggest that a comeback could begin soon for this iconic retailer.

Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

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