Fool contributor Stephen Simpson noted that in terms of full-line fashion specialty retailers that are publicly traded, Nordstrom (NYSE:JWN) has few peers, mainly Federated's (NYSE:FD) Bloomingdale's and Saks (NYSE:SKS). On the surface, the company appears to be taking advantage of its unique position, since the top line increased 8% in the most recent quarter, driven by solid 5.4% growth in comparable same-store sales. Additionally, operational improvements led to a 19% jump in operating income.
Digging a little deeper, we find that the apparel retailer is not without its challenges. To give us better insight into Nordstrom's current hurdles in Women's Apparel and what steps management is taking to overcome these obstacles, Bodhi "the sky's the limit" Zappa and Hank "the sky's falling" Schofield will join me as we analyze the company's first-quarter earnings conference call. Bodhi, start us off.
Bodhi: Thanks, bro. One thing that gets me excited about Nordstrom is its broad appeal -- it is successful across a wide range of geographic regions as well as in multiple lines of merchandise. CFO Mike Koppel indicated that same-store sales increases came from all of its geographic regions, with the southern and northwestern states as notable successes. As far as merchandising, he added that most of its major product categories performed well -- the standouts being Accessories, Cosmetics, and Men's Apparel.
Hank: Well, gosh, Bodhi, it looks like my work is done here -- everything sounds so perfect. Not so fast! Regrettably, Nordstrom's first-quarter earnings press release was lacking in the numbers department, particularly in regard to major category figures like Men's and Women's Apparel. The lack of information was further compounded by a lack of numerical detail in its conference call. That said, we can deduce from certain remarks made by Koppel, as well as the company's president Blake Nordstrom, that Women's Apparel remains a challenge for the retailer.
Jeremy: I agree -- more detail like growth rates, or lack thereof, in major product categories would be nice. We do know from management comments that merchandise margins for the quarter remained relatively flat. Despite the margin gains in other major merchandise categories, this metric saw no improvement as it faced greater than anticipated markdowns in Women's Apparel. That said, overall, gross margins did improve by 40 basis points, to the current level of 37.2%.
Hank: The markdowns may also be the reason that, despite solid comps in the first quarter, management is still sticking to its low-single-digit estimate in comps for the full year. Even when one analyst specifically questioned what negative impact might be compelling management to keep its low comps growth estimate, Koppel failed to offer any insight, instead offering a runaround answer: "Our guidance on comp has been very consistent with the way we've shared it in the past." Whatever that means. It still tells us little about what trends they may be seeing that warranted full-year comp guidance below year-to-date levels. Following Koppel's uninformative remark, the same analyst added that she wanted to make sure she wasn't missing something. I can tell you, I'm missing something.
Bodhi: Chill, I've got you covered. What you're missing is that while Women's Apparel has been a challenge in the past, in the future this segment represents a significant growth opportunity. Using "perpetual inventory tools" in conjunction with "personal book" -- a personalized service to aid its sales representatives in one-on-one customer relationships -- Blake Nordstrom noted that the company is continually gaining greater insight into the fashion tastes of its customers. By employing these techniques, he added, "Women's Apparel represents an opportunity for us to gain market share." You see the glass half empty, Hank, and I see it half full -- that's what you're missing.
Jeremy: You are the eternal optimist, Bodhi. Nordstrom did assert that, as a result of store-level feedback and general demographic data, the company now has "identified a strategy to better meet our customers' style, price, fit, and occasion needs." The company is in the process of finalizing its merchandise plans for the upcoming fall season "based on this strategy." One might conclude from these remarks that management sees upside in the women's biz in the periods ahead.
Hank: The fall is rapidly approaching, but it sounds like Nordstrom is still not settled on where women's apparel trends are headed. If I'm right, then I can certainly see why they have decided to maintain their low-single-digit estimate for growth in comps. When asked to comment on the Plus-size and Petites businesses, Blake Nordstrom responded that Plus-size is doing well, but that Petite lines are struggling. When the same analyst followed up, asking whether the company is making any changes concerning the weakness in Petites, Blake added that they were still evaluating the best way to proceed. Still evaluating with fall knocking on the door? If the glass is half full, it doesn't sound like it will be filled up this year.
Foolish conclusions
Jeremy: Nordstrom is being challenged in Women's Apparel, as exemplified by flat merchandise gross margins and low-single-digit comp growth estimates (presumably from continued weakness in this category). Does the present weakness present an opportunity for future growth? Management believes so. If this is the case, then shareholders should expect to see improvements in the second half of the year, since the refreshed women's lineup hits stores in the fall. While it may be too late in the game at that point to spur comps beyond the current projected range, the revamped Women's Apparel lines should be welcome news to fiscal 2007 results, especially for investors with a horizon longer than a couple quarters.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned.
