The bigger they come, the harder they fall. This old saying has proven accurate in the case of upscale retailer Nordstrom (NYSE:JWN) lately. After bottoming below $15 during the depths of the Great Recession, Nordstrom stock rallied as high as $83 earlier this year as investors bought into the company's growth strategy.
The stock has since lost more than a third of its value, though, as investors have started to question Nordstrom's growth prospects. Most of that drop came in the past month.
Indeed, Nordstrom's recent third quarter earnings report was certainly disappointing. However, its Q3 performance was far better than that of top department store chain Macy's (NYSE:M). I think Mr. Market has overreacted to Nordstrom's weak quarter, creating a great buying opportunity for long-term investors.
Nordstrom's comparable store sales growth slowed to 0.9% in Q3 as it experienced weaker sales trends across virtually its whole business. In physical Nordstrom and Nordstrom Rack stores, comp sales actually declined 2.2% -- this was offset by higher e-commerce sales. Still, total sales rose 6.6%, driven by new store openings, particularly for Nordstrom Rack.
Despite this sales growth, earnings per share fell to $0.42 (or $0.57, excluding transaction costs related to the recent sale of Nordstrom's credit card portfolio) from $0.73 a year earlier. Analysts had expected EPS of $0.72. Most of the shortfall came because Nordstrom had to take higher markdowns to clear unsold merchandise during the quarter.
Nordstrom also slashed its expectations for the full year. It now expects sales to grow 7.5%-8% year over year, rather than 8.5%-9.5%. The company's adjusted EPS forecast declined to $3.40-$3.50 from a prior range of $3.70-$3.80.
This isn't as bad as it looks
The weak Q3 sales results at Macy's and Nordstrom have stoked fears that the department store is dead, a victim of too much discounting and too much online competition.
For Macy's, where sales declined 5.2% in Q3 and are expected to decline about 3% for the full year, there may be something to this argument. Yet some of Macy's struggles this year appear to be temporary, driven by factors like unseasonably warm fall weather, a slowdown in tourist spending caused by the strong dollar, and short-term disruptions related to a major organizational restructuring.
For Nordstrom, it seems even more alarmist to conclude that there is something wrong with the company's business model. After all, just three months ago, Nordstrom raised its full-year guidance due to strong sales trends. Whereas Macy's has been struggling for nearly a year, Nordstrom was outperforming until a few months ago.
In fact, Nordstrom's new sales guidance is roughly in line with the original guidance it provided back in February. The only major difference is a lower expected profit margin, primarily driven by the markdowns it had to take last quarter.
Better times ahead
Despite the poor Q3 performance, Nordstrom's management claimed the company remains on track to meet its goal of reaching at least $20 billion in sales by 2020. That would be up from retail sales of $13.1 billion in 2014.
To some extent, that projection relies upon a return to better comp sales growth in the coming years. However, given that Nordstrom has only experienced a single quarter of weak sales -- unlike Macy's, which has to escape a deeper rut -- this seems like a reasonable expectation.
Additionally, Nordstrom's newer growth initiatives are performing extremely well. Nordstrom's new stores in Canada continue to outperform expectations, its Trunk Club personal stylist service is growing rapidly, and the relatively new Nordstromrack.com e-commerce site is providing a huge boost to Nordstrom's online sales.
These early stage growth initiatives are weighing on Nordstrom's profitability for the time being. Nordstrom expects to lose $56 million before taxes from the Nordstrom Canada and Trunk Club businesses this year. As these businesses mature to profitability in the next two or three years, they should provide a big boost to Nordstrom's earnings.
In the meantime, Nordstrom's stock sell-off comes at an opportune time for long-term investors, because Nordstrom just got a $1.8 billion windfall from selling its credit card receivables. It recently paid out half of this sum as a special dividend, but the rest will be used in the next few quarters for share buybacks.
Nordstrom's full share repurchase authority totals nearly $1.5 billion. With Nordstrom stock having fallen so far from its 52-week high, this is now enough to shrink the company's share count by 14%. These share buybacks on the cheap will further accelerate Nordstrom's EPS growth in the coming years.
Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.