What happened

Shares of Nordstrom (NYSE:JWN) were gaining today after the high-end department store chain posted a surprise profit, easily beating analyst expectations and showing that the company has adapted to difficult conditions during the pandemic. 

As of 11:31 a.m. EST, the stock was up 17.6%.

The entrance to the Nordstrom men's store in Manhattan

Image source: Nordstrom.

So what

Despite the stock's surge, the retailer is still experiencing significant headwinds from the pandemic. Net sales in the period fell 16%, which included a 10-percentage-point benefit from the shift in its annual Anniversary Sale to the third quarter. Revenue came in at $3.09 billion, essentially matching estimates at $3.1 billion. Sales were down substantially in both its full-price segment, excluding the impact of the Anniversary Sale, and the off-price business, which includes Nordstrom Rack. But digital sales were a bright spot, increasing 37% to $1.6 billion, making up 54% of total sales.

Gross margin declined from 34.3% to 32.8% as profits narrowed from the Anniversary Sale and a deleveraging from lower sales volumes. Still, the company cut overhead by 20%, which helped it deliver a per-share profit of $0.34. That was down from $0.81 in the quarter a year ago, but still much better than the consensus for a loss of $0.06. 

CEO Erik Nordstrom commented, "Our ability to significantly strengthen our financial flexibility early in the pandemic was key to delivering operating profitability of more than $100 million and cash flow of more than $150 million in the third quarter."

Now what

Looking ahead to the fourth quarter, management expects sales to be down in the low 20% range and sees profit margins narrowing due to a highly promotional environment and additional shipping surcharges during the holidays.

Still, Nordstrom has persuaded the market it can weather the pandemic, and with vaccines around the corner, the company looks like a strong recovery candidate, much like many of its retail peers. The stock has doubled over the last few weeks on the prospect of a coronavirus vaccine, but is still down 30% year to date, indicating more upside potential.