While 2020 was an awful year for department stores and most other apparel-focused retailers, sales and earnings surged above pre-pandemic highs in 2021 for many companies across the sector.
Nordstrom (JWN -0.34%) was an exception. For the first nine months of fiscal 2021, the upscale retailer posted revenue of $10.3 billion, down from $11 billion two years earlier. Over the same period, adjusted earnings per share (EPS) plunged from $1.95 to just $0.27.
However, the company's performance began to recover in the fourth quarter. That caused Nordstrom stock to surge 38% on Wednesday (the day after its Q4 earnings report).
Getting mostly back on track
Nordstrom recorded $4.5 billion of revenue last quarter, down 1% from the fourth quarter of fiscal 2019. Net sales were roughly flat for the full-line business, while the Nordstrom Rack off-price chain's sales sank by 5%, compared to Q4 2019. The full-line results were noteworthy because Nordstrom closed 16 full-line stores (14% of the store fleet) during 2020.
A combination of better inventory management and savings from rationalizing the store fleet enabled Nordstrom to expand its gross margin to 38.4% last quarter from 35% in Q4 2019. On the flip side, rising labor costs and fulfillment-cost pressures outweighed Nordstrom's cost-cutting efforts, causing operating expenses to increase by $133 million over the same period.
The net result was that Nordstrom's adjusted operating margin contracted by less than 1 percentage point, compared to Q4 2019. Adjusted EPS rebounded to $1.23, down just 13% from $1.42 two years earlier. This marked a big turnaround in performance, compared to the first three quarters of the year.
Opportunities for improvement abound
Nordstrom has a ton of room to grow sales and earnings beyond pre-pandemic levels over the next few years. First, the supply-chain chaos of 2021 severely disrupted the Rack business. Unlike most off-price chains, Nordstrom Rack relies heavily on products from upscale brands to drive traffic and sales. The supply constraints of the past year made it hard to procure clearance merchandise from the most desirable brands, which weighed on sales and profitability.
As supply constraints ease over time, Nordstrom Rack's results should improve. But management isn't sitting on its hands. The Rack chain is expanding its vendor base and merchandise selection and working hard to bring in more products from top brands to drive a faster turnaround.
Image source: Nordstrom.
Meanwhile, Nordstrom's full-line sales in Northern markets continue to trail its results in the Sun Belt by a wide margin. That's partly because of weaker traffic at its city-center flagships due to the pandemic's impact on tourism and office traffic. (Nordstrom operates downtown flagships in Seattle, San Francisco, New York, Chicago, Toronto, and Vancouver.) As more companies reopen their offices and tourism bounces back, this key piece of Nordstrom's business should recover naturally.
An optimistic outlook for 2022
Nordstrom expects to make meaningful progress this year. The company's initial outlook for fiscal 2022 calls for revenue to grow 5% to 7% year over year. That implies revenue would rebound to at least the $15.5 billion the company generated in fiscal 2019.
Moreover, Nordstrom estimates that its full-year operating margin will expand to between 5.6% and 6%. At the high end of the range, that would meet the target management set last year of generating operating margins of at least 6% once sales returned to pre-pandemic levels.
Based on these projections, Nordstrom anticipates posting EPS between $3.15 and $3.50 this year. Not only would this be double Nordstrom's adjusted EPS of $1.50 in fiscal 2021, it would roughly match the company's 2019 adjusted EPS of $3.37.
Some analysts think Nordstrom's guidance is way too optimistic. But even if sales and earnings don't recover as fast as management hopes, Nordstrom clearly has numerous opportunities to improve its earnings power relative to its recent results. With Nordstrom stock trading for just eight times the midpoint of the company's 2022 guidance, the stock looks like a good buy, despite the risk of an extended turnaround.
