What happened
Shares of Nordstrom (JWN 4.95%) were up big on Wednesday, rocketing 12.8% higher as of 12:20 p.m. ET.
The reason is easy to point out -- last night, Nordstrom reported first-quarter earnings that handily beat analyst expectations. Management also raised the low end of its guidance range for the year, which itself was also higher than analyst estimates.
The beat came as somewhat of a surprise, as retail earnings have generally disappointed this month; however, Nordstrom has some attributes that appear to have insulated it from the worst effects of inflation and the reopening of the economy.
So what
In the first quarter, Nordstrom grew revenue 18.7% to $3.47 billion, with adjusted (non-GAAP) loss per share of $0.06. Although Nordstrom posted a loss, this was a seasonally off-quarter, and the result was affected by some increased tax charges. Still, the revenue number was a fairly sizable $180 million beat over expectations. For the full year, management guided for 6% to 8% growth, up from its previous guidance of 5% to 7% growth, and for adjusted earnings per share of $3.20 to $3.50, up from prior guidance of $3.15 to $3.50. Prior to earnings, analysts estimated $3.11 on average for this year's profits. The company also authorized a new share repurchase program of $500 million.
It was interesting that the "core" Nordstrom banner actually grew faster, at 23.5%, exceeding pre-pandemic levels. Meanwhile, Nordstrom's discount outlet stores under the Nordstrom Rack banner only grew 10.3%, and didn't quite reach pre-pandemic levels. Gross margin grew 190 basis points to 32.8%. This all seems to indicate the consumer is splurging on high-end apparel and footwear amid the economic reopening, relative to other types of retail goods. And this makes a lot of sense; during the stay-at-home pandemic economy, consumers splurged on homes and home goods, as they saved lots of money by not spending on experiences. Now, consumers are going back to experiences and in-person settings, which likely means refreshing one's closet.
Image source: Getty Images.
Now what
This was a positive quarter for sure, and was a welcome sigh of relief after other retail sector bellwethers like Walmart and Target posted dismal earnings that sent much of the retail sector plummeting earlier this month.
What conclusions can we draw? It appears inflation is biting the lower- and middle-end consumer pretty hard; however, things aren't so bad as to prevent the more high-end consumer served at Nordstrom from spending big on full-priced suits and dresses. At least, not yet.
Recently, the CEOs of large banks have pointed to strong consumer spending, even though some retailers and advertising companies have reported bad numbers with bad guidance. The situation seems to reflect that consumers are still spending, but are being much choosier about what they spend on. Additionally, it appears the gap in spending power between the well-off and mass-market consumer is widening.
However, if we have a bad recession, as some are predicting, it's unclear if the well-off consumer will continue splurging as we get further into reopening. On the other hand, if inflation comes down and we don't have a bad recession, the low-end consumer might bounce back. As is the case with most stocks, the path of inflation will be key for retailers this year.
Nordstrom appears quite well positioned for this environment and is clearly executing well. It's also a cheap stock, trading at just 6.9 times the middle of this year's guidance, while paying a hefty 3.5% dividend.
