Shares of Dick's Sporting Goods (DKS 1.81%) hit an all-time high after a monster first quarter, as CEO Lauren Hobart continues to impress. Zscaler (ZS -0.16%) pops 15% after the cybersecurity company continues to invest in growth. In this episode of MarketFoolery, Motley Fool analyst Alicia Alfiere analyzes those stories, as well as the challenges and possibilities facing Nordstrom.

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This video was recorded on May 26, 2021.

Chris Hill: It's Wednesday, May 26th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: So glad to be here.

Hill: We've got retail earnings. We're going to start today in the cloud. Zscaler, the Cloud-based cybersecurity company, came out with a strong third quarter report. Revenue was higher-than-expected. Their full-year guidance was upbeat. They cited increased demand for cybersecurity products and services and shares of Zscaler up 15% this morning.

Alfiere: Let's talk briefly about Zscaler. As you mentioned, they're a cloud-based cyber security platform that offers its services on a subscription basis. They provide protection no matter where users are. This is increasingly important in our remote work lives and as the company noted in their call, increasingly important as more and more companies find themselves stealing with ransomware and other cyber attacks. 

For the results, so a key thing to note here before we get into the results, Zscaler is primarily focused on getting new customers and increasing their current customers spend for their services. If you're looking at their results, you'll notice that their operating expenses, so sales, and marketing, R&D, general and administrative, they're all increasing. In fact, they increased about 53% year-over-year. This is because Zscaler is aggressively targeting growth. They are building out their sales teams, investing in their engineering teams, and building out their teams to support their growth. As a result, they're reporting net losses instead of net income, again, this is because they are focused on this aggressive growth. Since their focus [laughs] is growth, let's talk about it. The company has more than 5,000 customers and revenue for this quarter grew 60% year-over-year to $176.4 million. It's important to note here that their sales come from both new and existing customers. Platform upsells are really important to their strategy, which is like a lot of Software-as-a-Service companies. It's a land and expand strategy. You'd look to get new customers, that's your land, and then you look to get those customers to spend more. That's your expand. For Zscaler, this has been working really well. In the quarter, they posted a 126% based net retention rate. So not only do customers stay, they spend more. Zscaler has also made some interesting acquisitions, including Smokescreen technologies, which provides technologies to detect active tax, and this will help expand Zscaler's defense capabilities. Really exciting stuff here.

Hill: Look, I know it's been a rough time over the last few months for stocks like this, for Cloud stocks, growth stocks, the Nasdaq, a lot of the companies that we follow at The Motley Fool, you go back far enough and they're doing really well. You go back just a few months and they're all down from their highs. It's nice to see this bounce back from Zscaler. They're a growth company, and they're doing the things you would want them to do in terms of their spend. I'm curious if you think that this is an industry that is for all intents and purposes a must-have for investors like us, that when you look at your portfolio and hopefully you are building to the point where you've got 25 or more stocks in your portfolio. You've got some, I'm not saying necessarily Zscaler, but some exposure to cybersecurity because it really seems like one of those industries that if it's not in your portfolio, you should work to find a place for it.

Alfiere: I would agree. I think one of the important things that we can do as investors is really diversify the foundation of our investments. As you talked about cybersecurity, especially with these ransomware attacks that we've been seeing, could be a really important place to look to grow your own portfolio. It depends on your own risks as an investor of course, but yeah, I think diversification is never a bad thing.

Hill: Look, you never want to see what we saw recently in terms of the pipeline being held for ransom and production shutdown and certainly here in Virginia and in North Carolina and other states, gas prices spiking as a result of that. But it does seem like that type of activity is one giant advertisement for the cybersecurity industry.

Alfiere: Definitely.

Hill: Nordstrom's loss in the first quarter was nearly double what Wall Street was expecting. Shares of Nordstrom fell 8% this morning. Among the issues Nordstrom is dealing with is inventory problems, which every retailer has to manage inventory and in Nordstrom's case, they had left over stuff from the holidays they were dealing with and had to discount and try and get off the shelves.

Alfiere: I mean, they are trying. [laughs] I think that's an important thing to note here [laughs] for their fiscal first quarter. I've made you laugh of course [laughs].

Hill: [laughs] There are four profit businesses, of course they should be trying.

Alfiere: They are. But here let's go through the results here because they are in the middle of a turnaround plan and I think that's important to note here. Net sales for the quarter increased 44% year-over-year. But last quarter was deeply affected by COVID. They did benefit from some of the demand recovery due to increased vaccinations, easing restrictions and of course, government stimulus checks. But when we compare this quarter to the pre pandemic, first quarter 2019, through net sales decreased about 13%. Their digital sales are strong and growing, they increased 28% against the pre-pandemic first-quarter. Here's the promising sign, so during the quarter, there were over a million downloads of Nordstrom's apps. That's an increase of over 50% over the first quarter of 2019. But they did report a loss, which was granted with improvement over the first quarter 2020, again, with those COVID impacts, but it is down from the first quarter of 2019. They did have issues with higher labor, shipping costs and some supply constraints that really pressured the results. But again, they're in the middle of this turnaround strategy as if we take a deeper look at the things that they've been doing, so they are increasing their customer choices. 

They plan to increase merchandise selection to 1.5 million items over the next several years. They've made some progress. With the recent quarter, they increased their choice count with, what they're calling it, a roughly 20% versus 2019. Nordstrom Rack sales increased at 10% sequentially from the fourth quarter, but they were down 13% when we compare them to the first-quarter 2019. Still some work to do here. But the company noted that their sales in kids home and active categories actually increased 37% against those pre COVID first-quarter 2019 numbers. That's good, and also for the first time since the start of the pandemic, Nordstrom rack sales outpaced inventory growth. Hopefully we're seeing a reversal of those trends that you were talking about earlier. They are also expecting some bright spots ahead as they've mentioned that their anniversary sale is coming up. I don't know if you're a shopper at Nordstrom, are you?

Hill: I'm not. [laughs] I'm sure any shareholders who are listening, would like that and I don't know, every single friend I have on the planet would start shopping there. But no, I mean, this is a long-standing business. They're celebrating their 120th anniversary, so that's nothing to sneeze at, but in terms of the bright spots ahead, it really seems. Let me back up. This stock where it's trading today is where it was five years ago. It's risen and fallen since then, but it's basically where it was five years ago. I am not saying everything for this business is riding on the next six months but it does seem like coming out of the pandemic. This is a great opportunity for Nordstrom to demonstrate that it is focused on the future. It is becoming a different type of company and it is leaving the past behind because of the downloads of the app, that's an encouraging sign. They've got a great opportunity here when you think about more people going back to work, there is brand equity for Nordstrom factor in that we're going to have the two most important seasons for retailers like Nordstrom, which is back-to-school and the holidays. They've got an opportunity here. But if they can't make the most of the next six months, then it's hard for me to come up with a reason why anyone should buy the stock.

Alfiere: That's there. I think some of the interesting things that I am going to be looking at is, so they talked about adding personalized styling experiences. We think that could potentially help them. Also, in terms of when their anniversary sale is. They're expecting that it's actually pretty well-timed as the economy is reopening and as we start to reenter society and get out of those soft and expandable clothes that we would get into proper pants. It is possible that they can really turn around. We'll see.

Hill: We save the best for last because the stock of the day is Dick's Sporting Goods. First quarter profits weren't just higher-than-expected. They more than tripled expectations, same-store sales more than doubled, and guidance for the fiscal year was up. I mean, this was as good a quarter from a retailer as we've seen this earnings season.

Alfiere: Yeah. I think sports are back. Dick's has the largest U.S. sporting goods retailer and they believe they are positioned well to extend this lead. They have strong partnerships with brands like North based, Callaway, adidas, Nike, Under Armour, and they also have their own vertical brands like CALIA for women, which is a strong performer and they've recently launched a new men's brand called [...]. They've done a good job of being flexible during the pandemic. One of my favorite little figures that shows just how flexible they've been, is that it took them only two days to launch their curbside pickup during the pandemic so that's incredible. But let's talk about the first quarter, which as you said, was really strong. First quarter net sales increased 119% year-over-year to total $2.9 billion. Also that's a 52% increase over the pre pandemic first quarter. This was driven by 115% year-over-year increase in same-store sales, which includes the 14% increase in their e-commerce, curbside, which I talked about before, and buy online, pickup in store sales increased roughly 500% over the first quarter 2019, which is incredible. A big factor here was the resurgence in team sports as many kids are returning to sports after a year when we saw a lot of activities being canceled or delayed. 

They also benefited from government stimulus checks as well. Also, two million new athletes, which is what they call their customers regardless of if you're a couch potato like me. But nearly two million new athletes joined their sporting goods ecosystem. The company also delivered record quarterly earnings of $3.41 per diluted share. This is up 459% over those pre-pandemic first quarter 2019 numbers and a huge improvement over a loss of a $1.71 per diluted share in the first quarter of 2020, so truly impressive results here.

Hill: The stock as I mentioned, is up, it's at an all-time high. Do you look at it as being particularly expensive or do you look at Dick's Sporting Goods and think now this thing has room to run?

Alfiere: I think that they have room to run actually and they have some interesting developments that they're working on here. Like a lot of retailers including Nordstrom, they're looking to use data science to have a more personalized experience further athletes and customers, they are also creating really interesting new store options. They created a Dick's House of Sport in Rochester, New York, which is a reimagined and experiential store. This is interesting and I'm excited. I want to go visit it. This is a place where athletes and enthusiasts will be able to climb rock walls, practice on an outdoor field. Dick's envisions this as somewhere you could learn, be inspired, and of course buy some sporting goods, which is obviously important. Really interesting things going on as they talked about as well, super flexible company. Really impressive that it took them only two days to start curbside pickup.

Hill: I was thinking back to when Brian Cornell took over at Target as CEO and it was the summer of 2014 and his first year as CEO and that was a retailer that had struggled, which is why they needed a new CEO. Brian Cornell's first year as CEO at Target was not just great. It was obviously something that was a sign of things to come for that business. I think the stock was up about 35% during his first year as CEO. Lauren Hobart, took over as CEO of Dick's Sporting Goods back in February, and I think it's fair to say that there were a lot of eyes on her because this was a family run business since it was started in the late 1940s. It was started by Dick Stack. He was CEO when his son took over. I mean, this was a family run business for 70 years. She is off to as good if not better start than Brian Cornell was in 2014. I'm not saying that Dick's Sporting Goods as a stock is going to have that type of a run but if her leadership early on is any indication of what shareholders can expect, then this is a company with a lot of growth potential.

Alfiere: Agreed. It's really exciting to see which could do here. She's not new to the company to be fair, she did start in 2011 as a Chief Marketing Officer so she's had some time with the company. It would be really interesting to see just where she could take it and where it goes from here.

Hill: Alicia Alfiere, great talking to you. Thanks for being here.

Alfiere: Still glad to be here.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.