U.S. retail sales have surged in recent months as the easing of the COVID-19 pandemic this spring unleashed a torrent of pent-up demand. As a result, several top department-store operators have reported impressive second-quarter results this month.

On Tuesday afternoon, Nordstrom (JWN 0.39%) posted stronger Q2 sales and earnings than either management or Wall Street analysts had expected. However, the iconic retailer's earnings report didn't match up to the incredible results reported by many of its peers recently.

That caused Nordstrom stock to plummet 17.6% on Wednesday and fall another 8.5% on Thursday, wiping out a quarter of its market value. Let's see what this development means for long-term investors.

JWN Chart

Nordstrom stock performance, data by YCharts.

The raw numbers

Nordstrom's net sales doubled year over year to $3.56 billion last quarter, while total revenue reached $3.66 billion. Meanwhile, the company swung to a solid profit of $80 million ($0.49 per share), compared to a $255 million loss a year earlier.

These results beat the analyst consensus, which had called for earnings per share of $0.28 on net sales of $3.31 billion. Furthermore, the company's year-to-date operating profit of $66 million exceeded management's previous forecast of roughly breakeven operating profit for the first half of fiscal 2021.

Nordstrom also increased its full-year guidance. It now anticipates year-over-year revenue growth of more than 35% and an operating margin between 3% and 3.5%. Previously, the fashion retail giant had expected full-year revenue growth of more than 25% and a full-year operating margin of around 3%.

A lagging recovery

While Nordstrom's return to profitability and guidance increase were both encouraging, its results look less impressive when compared to its pre-pandemic performance. In the second quarter of fiscal 2019, Nordstrom recorded earnings per share (EPS) of $0.90 on net sales of $3.78 billion. Thus, sales remained 5.6% lower than in Q2 2019 last quarter, while EPS fell by nearly half.

Similarly, Nordstrom's full-year forecast implies that its operating margin would contract by more than 2 percentage points, compared to fiscal 2019.

These results may not seem too bad considering that the pandemic hasn't even ended. However, several other department-store chains surpassed their 2019 sales and dramatically exceeded their 2019 earnings last quarter.

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

Image source: Nordstrom.

The Nordstrom Rack off-price business performed especially poorly. Sales fell 8%, compared to two years ago. By contrast, the biggest U.S. off-price retailers all recorded 20%-plus sales increases over the same period.

In short, Nordstrom continues to struggle relative to 2019, while peers are earning bumper profits. It's quite reasonable for investors to wonder what that means for Nordstrom stock's long-term prospects.

No cause for panic

Investors shouldn't have been so surprised that Nordstrom is recovering more slowly than its peers. The company's merchandise mix puts it at a severe disadvantage relative to publicly traded rivals in the current environment.

In fiscal 2019, apparel and shoes drove a full 75% of Nordstrom's sales. Moreover, within those categories, its assortments skew toward dressier items for work and special occasions. While Nordstrom reported strong growth for its home and activewear assortments last quarter, those businesses are far too small to move the needle right now.

Management also pointed to severe inventory-flow disruptions due to supply-chain congestion, particularly impacting Nordstrom Rack. Adding to the pressure on the business, the company is early in the process of pivoting the merchandise mix at many Nordstrom Rack stores to lower-priced items.

While weddings and galas have resumed to some extent this summer, many more events were postponed to 2022. That could drive a surge in demand for special-occasion items next year. More Americans will likely return to office settings next year, too, unleashing pent-up demand for dressy clothing. And with each passing year, Nordstrom can continue to build up its home and active businesses, tapping into secular growth trends.

Together, these factors suggest that investors should be patient with Nordstrom stock. The company has already returned to profitability, an important step. A potential rebound in demand for dressy items could lift Nordstrom's sales and earnings to 2019 levels or beyond in 2022.