After a rough week for the department store chain, shares of Nordstrom (NYSE:JWN) bounced back following a better-than-expected earnings report. Though net sales, which the company uses as a substitute for comparable sales, declined 2.2%, adjusted earnings per share jumped from $0.67 to $0.81, easily beating analysts' consensus expectation of $0.64. Fewer markdowns, improved results from its anniversary sale event, and a 10% decline in shares outstanding due to stock buybacks helped boost the bottom line. Management also lifted its full-year earnings guidance modestly from a $3.25 to $3.50 range to a $3.30 to $3.50 range.
The stock closed last Friday up 10.6% as the market's expectations for the report had been muted following disappointing quarterly reports from other retail stocks like Kohl's and Macy's. With its long-awaited New York City flagship store finally open and the holiday season just around the corner, the company may be at a turning point. During the earnings call, management shared some key information about the factors that could move this stock in the coming quarters.
1. Order pickup is key
One big focus for the retailer recently has been to provide customers with faster delivery and make order pickup easier. In pursuit of that goal, it has opened five Nordstrom Local outposts in New York and Los Angeles, and made order pickup available at more Rack stores.
On the earnings call, management shared that order pickup is the company's most profitable transaction, and Co-President Erik Nordstrom went further in explaining why order pickup at Rack, Local, and full-line stores gives the company an advantage over competitors like Amazon. "A good chunk of customers like the control of picking up in-store, be it there's an apartment without a doorman, or things have been stolen from their porch, or they want to try it on before they take it home," he said. "Having an alternative means a lot."
Nordstrom is planning to expand the Local store concept, which is unique among its peers, and make pickup available at more Rack locations. That should drive more sales growth and profitability.
2. Capital expenditures are about to cool off
The opening of its flagship store in Manhattan marked an end to the company's several-year-long investment cycle, during which it expanded into Canada, improved its digital capabilities, and deepened its penetration of the Greater New York market, including the addition of a full-line store in Norwalk, Connecticut.
With those projects complete, CFO Anne Bramman said that capital expenditures would decline from 6% to the 3% to 4% range next year. That should elevate free cash flow by $300 million to $450 million, giving the company additional financial flexibility to buy back shares, pay down debt, increase its dividend, or save for future investments. Shareholders will reap the benefits in one way or another.
3. NYC is off to a good start
The new flagship store's early results did not disappoint -- the Manhattan location received 85,000 visits in its opening weekend.
"New York City represents our largest online market and we expect to see a halo effect when we open a physical location," Erik Nordstrom said. "Already, the sales uptick in the men's store is exceeding expectations." Additionally, management said traffic at the Nordstrom Local stores in Manhattan was growing much more quickly than expected, and the response to the same set of services at Manhattan Rack stores has also exceeded expectations.
With all of the new stores in the New York area (two Nordstrom Local locations have been added as well), customers there now have seven times as much selection available for same-day delivery or next-day pickup.
Finally, management expects a significant lift from the new flagship store, predicting that it will add 150 basis points of sales growth in the fourth quarter. Over the next three years, management expects to continue to grow sales as its newer stores mature.
Nordstrom still faces challenges, including declining sales in its full-line department stores and sluggish online sales growth. However, its initiatives in New York, its order-pickup and local-market expansion, and its reduction in capital expenditures paint a picture of a retailer with a smart strategy and improving financials.
Investors should keep an eye out for its holiday results, as those will provide a clear indication as to whether these investments are paying off.