Nordstrom (NYSE:JWN) didn't have a very happy holiday season. Last week, it announced that sales slumped in November and December, which will virtually wipe out its profit for the fourth quarter of fiscal 2020.

However, in light of Nordstrom's focus on dressy clothing, it was a foregone conclusion that sales would be subpar in the pandemic environment of 2020. More importantly, Nordstrom survived the year and will be ready to capitalize on the opportunities that become available during the recovery period ahead.

Slow improvement in sales trends continues

During the second quarter of fiscal 2020, Nordstrom's sales plunged more than 50% year over year, due to temporary store closures and the company's decision to delay its popular Anniversary Sale. Sales trends improved significantly in the third quarter, which ended on Oct. 31. Net sales fell 16%, including a benefit of roughly 10 percentage points from the timing of the Anniversary Sale.

The exterior of Nordstrom's Manhattan flagship store

Image source: Nordstrom.

Last Wednesday, Nordstrom reported that sales dropped 22% for the nine-week holiday period. Some pundits and analysts found this disappointing, particularly because Nordstrom has been one of the strongest operators in the department store space. Neil Saunders of GlobalData Retail blamed the sharp decline on Nordstrom stocking too much high fashion during the holiday season and not enough cozy and athleisure items.

On the other hand, Nordstrom's holiday sales met management's expectations. (Back in November, it projected that sales would fall more than 20% in the fourth quarter.) Management likely recognized that the company's merchandise assortment would weigh on sales. Nordstrom did try to shift its assortment toward casual items after the pandemic struck -- it just had limited flexibility in that regard.

Despite that headwind, sales trends improved by almost 5 percentage points compared to the third quarter, after adjusting for the shift in Anniversary Sale timing. Nordstrom added that sales trends improved sequentially in December relative to November and that momentum has continued into January.

A modest profit on tap

Nordstrom posted surprisingly strong earnings results during the third quarter, despite a double-digit sales decline. The company doesn't expect to repeat that feat this quarter, though. Management estimates that Nordstrom's operating margin will contract by about 5 percentage points relative to the fourth quarter of fiscal 2019, primarily due to lower sales and aggravated by holiday-related premium pay and shipping surcharges.

The entrance to a Nordstrom Rack store, with Nordstrom's Seattle flagship store in the background

Image source: Nordstrom.

This guidance implies that Nordstrom will earn a very small profit in the fourth quarter. Indeed, analysts slashed their earnings estimates following the holiday update. The Wall Street consensus now calls for Nordstrom to earn $0.17 per share this quarter, down from an average estimate of $0.46 a week earlier and $0.64 two months ago.

The outlook for 2021 and beyond is much brighter

Nordstrom's results this quarter won't be anything to write home about. But at least the upscale retailer is in the black after ringing up huge losses in the first half of 2020. Furthermore, Nordstrom's revenue could bounce back fairly quickly as the economy starts to reopen later this year.

Whereas Nordstrom spent much of the past year trying to retool its product offerings on short notice for the "stay-at-home" era, the post-pandemic environment will play to its strengths better. As workers return to the office and social events like weddings, proms, and galas resume, many people will look to refresh their wardrobes. Nordstrom should be able to capitalize on this uptick in demand for dressy apparel.

Equally importantly, Nordstrom has improved its cost structure over the past year. The retailer slashed overhead spending. It also closed 16 underperforming full-line stores while doubling down on its omnichannel strategy in its top 10 markets by opening additional Nordstrom Local service hubs and launching new fulfillment capabilities at its off-price Nordstrom Rack stores.

The pandemic highlighted why Nordstrom should work to expand its product range over time. The home market represents a particularly big opportunity where the retailer currently punches below its weight. However, while diversification will be important in the long run, Nordstrom is well positioned for a strong recovery over the next couple of years as demand returns within its core fashion business.

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