Among apparel-focused retailers, Nordstrom (NYSE:JWN) has been especially proactive about pivoting to e-commerce. Nevertheless, the COVID-19 pandemic crushed Nordstrom's results earlier this year due to the company's focus on selling dressy apparel for work and social events.

Despite reporting dreadful results earlier this year, Nordstrom stock has doubled this month as investors have grown hopeful about COVID-19 vaccine candidates being approved soon. On Tuesday, the iconic fashion retailer reported third-quarter results that were far better than expected, proving that it is already on the road back to health.

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Nordstrom year-to-date stock performance. Data by YCharts.

A huge turnaround

In the first half of fiscal 2020, Nordstrom's sales plunged more than 40% year over year, even after adjusting for a shift in the timing of its popular Anniversary Sale event. Double-digit growth in digital sales -- which already accounted for 31% of company sales in the prior-year period -- couldn't make up for plunging store traffic. Not surprisingly, the sales erosion led to big losses.

By contrast, Nordstrom's sales declined 16% in the third quarter. That result included a 10 percentage-point lift just from shifting the Anniversary Sale to August, but even excluding that, it's still a strong sequential improvement .

Even more impressively, Nordstrom returned to profitability last quarter, posting an operating profit of $106 million and earnings per share of $0.34. Excluding a one-time tax benefit related to the CARES Act, adjusted EPS came to $0.22. This far surpassed the analyst consensus, which had called for a loss of $0.06 per share. The results also exceeded Nordstrom's internal expectations.

Positive cash flow and balance sheet improvement

In the first half of fiscal 2020, Nordstrom burned over $900 million of cash. Fortunately, its improved sales and earnings trends allowed it to generate strong cash flow last quarter. Free cash flow totaled $195 million for the period, reducing year-to-date cash burn to $708 million.

The entrance to a Nordstrom Rack store, with the Nordstrom flagship store in the background.

Image source: Nordstrom.

As a result, Nordstrom was able to pay down $300 million of borrowings from its revolving credit facility for the second straight quarter. This left it with just $200 million outstanding on that credit facility. Even after that repayment, Nordstrom ended Q3 with $889 million of cash and equivalents -- up from $487 million a year earlier -- and $1.5 billion of total liquidity.

A foundation for future growth

While Nordstrom's sales are still shrinking -- and the company expects sales to fall at least 20% in the fourth quarter -- management is already turning its focus toward the future. Nordstrom plans to continue chasing growth in stronger merchandise categories like activewear, beauty, and home. However, it is also poised to benefit from a rebound in sales of dressier apparel styles as people return to the office and start going to big social events again.

The downsizing and disappearance of weaker rivals should help Nordstrom in its quest to return to growth. Management isn't standing still, though. For example, during 2020, Nordstrom has rolled out new fulfillment capabilities, such as enabling order pickup at Nordstrom Rack stores even for full-line merchandise. It is blending in-store and online inventory for its off-price business, giving customers access to more choices. Nordstrom is also scaling up its "market strategy" by adding two more Nordstrom Local service hubs in the Los Angeles area and offering faster deliveries in its top 10 markets (up from five key markets a year ago).

Together, these moves give the fashion retailer a chance to capture market share that will be up for grabs in the coming years. Meanwhile, the company is poised to exceed its cost-cutting goals this year, including substantial permanent reductions to overhead. This sets the stage for Nordstrom to make a spectacular comeback as the world recovers from the pandemic.

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