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Nordstrom Scares Retail Investors With Weak Holiday Results

By Dan Caplinger – Feb 18, 2016 at 7:45PM

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The upscale retailer fell short of expectations, even after adjusting for asset-impairment charges.

Image: Nordstrom.

Retail stalwart Nordstrom (JWN 3.48%) has a strong reputation for quality and customer service, and many investors look to the department-store retailer as a barometer of the high-end of the retail market generally. Coming into Thursday's fiscal fourth-quarter financial report, Nordstrom investors were bracing for declines in earnings, and fairly tepid sales growth.

Yet the results that Nordstrom posted weren't even enough to keep up with those lowered expectations, and the report sent shock waves through the industry that pushed shares of rival Macy's (M 1.33%) lower in after-hours trading, as well. Let's take a closer look at Nordstrom's most-recent report, and whether investors can expect better conditions in 2016.

Nordstrom plays Scrooge for the holidays
Nordstrom's fiscal fourth-quarter results didn't give investors what they had hoped to see. Total revenue climbed 3.7%, to $4.19 billion, which was a bit less than the $4.22 billion consensus forecast among those following the stock. Net income fell almost 30%, to $180 million, and even after adding back asset-impairment charges, adjusted net earnings of $1.17 per share fell short of the $1.20 per share that most investors had expected.

As we saw last quarter, comparable-store sales growth remained extremely weak. Overall comps rose 1%, and the full-price Nordstrom segment saw comparable sales rise just 0.2%. In fact, the online business carried Nordstrom's quarter, posting a net sales increase of 11%. Brick-and-mortar store sales crumbled, falling 2.5% overall, and 3.2% on a comparable basis.

One area that improved was the Nordstrom Rack discount arena. There, net sales climbed 12%, pushing comps up by 3.6%. Again, though, e-commerce was the growth driver. Sales at and jumped by half, outweighing comparable-store sales declines of 3% for Nordstrom Rack physical-store locations.

Nordstrom said that the beauty and shoe segments produced the top performance during the quarter, and women's apparel also saw gains from demand for coats, denim, dresses, and departments focused on younger customers. Still, gross profits fell almost two percentage points, to 34.8%, and Nordstrom cited larger markdowns in response to promotions from Macy's and other competitors during the holiday season.

Can Nordstrom bounce back in 2016?
Nordstrom hasn't given up on its growth initiatives. The company said that it expects to open almost two dozen new stores, including three full-line Nordstrom stores, and 20 Nordstrom Rack locations. It also expects to relocate one full-line location and two Nordstrom Rack stores. Four of those openings are expected in March, including a full-line store in Hawaii, and Nordstrom Racks in Louisiana, Utah, and Virginia. The bulk of the expansion will occur during the fall months in anticipation of the 2016 holiday season.

Yet Nordstrom has felt the need to respond to sales trends by reducing expenses and capital investments, and that helped establish its guidance for fiscal 2016. Nordstrom expects sales gains of 3.5% to 5.5%, with comps coming in flat to up 2% for the year. Earnings guidance in a range between $3.10 and $3.35 per share would be well below the $3.53 per-share consensus forecast among investors currently.

Even more painful will be the front-ended nature of declines. Nordstrom believes that earnings per share will fall by 30% compared to year-ago levels in the first half of fiscal 2016, stemming from pre-opening expenses on new stores, and the shift of its key Anniversary Sale event across quarters this year compared to fiscal 2015.

The news not only affected Nordstrom shares, which fell 8% in after-hours trading following the announcement, but Macy's, as well, which posted its own 1.5% drop after the closing bell, in sympathy. Given that Nordstrom and Macy's are both aiming at the same general audience, the struggles that Nordstrom has seen could hurt Macy's results when it announces next week. Meanwhile, Nordstrom will have to retrench, and aim to find new ways to grow despite tough conditions in the retail industry.

Dan Caplinger has no position in any stocks mentioned. 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.

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Stocks Mentioned

Macy's Stock Quote
$17.53 (1.33%) $0.23
Nordstrom Stock Quote
$19.35 (3.48%) $0.65

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