Nordstrom (NYSE:JWN) stock was up slightly on Thursday after the market close, as the company released earnings for the quarter ended on May 2. While earnings were lower than expected, the main fundamental drivers are moving in the right direction.
Decent sales in a tough environment
Total sales during the first quarter of fiscal 2015 came in at $3.1 billion, a year-over-year increase of 9.8% versus $2.8 billion in sales during the same period last year. Total company comparable sales during the quarter grew 4.4%. Wall Street analysts were, on average, expecting $3.16 billion in total sales, so the number was marginally below expectations.
Department stores with a big focus on apparel are going through a challenging period, as consumers don't seem to be willing to spend much on these items lately. Also, the West Coast port slowdown was a considerable drag on sales during the month of February.
Macy's (NYSE:M) announced on Wednesday a 0.7% decline in total sales on the back of a 0.1% decline in comparable-store sales. According to Macy's management, this was due to: "Delayed merchandise shipments from the West Coast port slowdown and severe winter weather early in the quarter restrained business levels. Moreover, sales were negatively affected by lower levels of spending by international tourists visiting major U.S. cities."
Kohl's (NYSE:KSS) missed sales expectations, too. The company announced an annual increase in total revenues of 1.3%, while comps increased 1.4%. Management said in the press release that performance was below expectations in February, but sales improved in March and April.
The key growth drivers are doing well
Considering how tough the macro environment is on most department stores, Nordstrom's sales performance during the quarter looks quite healthy, and certainly much stronger than the numbers being reported by other industry players.
Besides, key growth areas such as Nordstrom Rack and the online channel delivered solid expansion during the quarter. Nordstrom Rack net sales increased 12% year over year, reaching $831 million. The company opened 10 new Nordstrom Rack stores during the quarter, while comparable sales in this segment declined 0.2%.
Nordstrom.com revenue grew 20%, to $480 million, while revenues coming from Nordstromrack.com and HauteLook on a combined basis grew 51%, reaching $117 million. When including both Nordstrom.com and Nordstromrack.com/HauteLook, Nordstrom made $597 million in online sales during the quarter. This represents a big 19% of total revenues.
Customer loyalty looks quite strong, too. The Company opened more than 285,000 new Nordstrom Rewards accounts in the quarter, ending the period with 4.4 million active members. Sales from members increased 11% in the first quarter and represented 38% of total sales.
On margins and earnings
Gross profit margin was 35.9% of sales, an increase of seven basis points compared with the same period in fiscal 2014. Healthy gross margins are quite encouraging considering the difficult industry environment, and the fact that Nordstrom is rapidly expanding its lower-priced Nordstrom Rack business.
On the other hand, inventory grew 19% during the quarter, far outpacing the sales increase of 9.8%. This could be an important risk to watch, as excessive inventory levels can be a sign of growing difficulties down the road in the retail business. For what it's worth, management said in the press release that ending inventory was in line with expectations, as the company is increasing inventory levels to support online growth and rapid expansion in Nordstrom Rack, Nordstromrack.com, and Canada.
Selling, general, and administrative expenses represented 31.2% of sales during the quarter, an increase of 141 basis points compared with the same period in fiscal 2014. Rising costs due to growth initiatives related to Trunk Club, Canada, and continuing fulfillment and technology investments was the main reason behind declining operating earnings.
All in all, earnings per share missed analysts' forecasts at $0.66 versus $0.71 per share forecasted by Wall Street.
It's never nice to see earnings below expectations, but this was mostly due to investment for growth. Nordstrom is delivering solid performance under challenging circumstances, and the main growth drivers look quite strong. The fact that earnings came in below forecasts is no big reason for concern from a long-term point of view.