Earnings Scorecard: Nordstrom (JWN)

Nordstrom Inc. (JWN) recently posted earnings growth of 35.0% to reach $1.04 per share in the fourth quarter of fiscal 2010 from 77 cents per share earned in the year-ago period. Earnings per share beat the Zacks Consensus Estimate of $1.00 per share.

For fiscal 2010, earnings per share came in at $2.75 per share, up 36.8% year over year and ahead of the Zacks Consensus Estimate of $2.71 per share.

Quarterly Review

Nordstrom’s same-store sales and top-line trends were also encouraging. Total revenue grew 10.9% to $2,916 million from $2,640 million in the prior-year period on the heels of a 6.7% growth in same-store sales. Total revenue marginally fell short of the Zacks Consensus Estimate of $2,918 million.

During the quarter, multi-channel same-store sales jumped 7.2%, driven by the Jewelry, Dresses and Women’s Shoes categories. Full-line same-store sales growth was driven by strong performances in the Midwest and the South. Nordstrom Rack same-store sales increased by 3.9%. The company expects same-store sales to grow in the range of 2% to 4% in fiscal 2011.

Improved merchandise margin coupled with lower buying and occupancy costs led to a 34 basis point (bps) year-over-year expansion in gross margin to 39.7% in the quarter. Nordstrom’s operating income posted an increase of $96 million year over year to $406 million, while operating margin expanded 210 bps to 13.9%.

Guidance

The company sees fiscal 2011 earnings per share in the range of $2.95 to $3.10.

Agreement of Analysts

Analyzing estimate revision trends, following the 2010 earnings report, we find a mixed sentiment among the analysts for the fiscal years 2011 and 2012. Over the last 30 days, 5 of the 14 analysts covering the stock have revised their estimates upward while 3 moved in the opposite direction for fiscal 2011 while, for fiscal 2012, 3 of the 16 analysts covering the stock have increased their estimates in the last 30 days with 2 analysts revising their estimates in the downward direction.

For the two subsequent quarters the analyst community holds a similar divergent view. For the first quarter of fiscal 2011, 2 out of 16 analysts have revised their estimates upward over the past one month with 5 analysts moving their estimates downward. For the second quarter of fiscal 2011, 2 out of 15 analysts have increased their estimates with 3 analysts lowering their estimates in the last 30 days.

Magnitude of Estimate Revisions

The net effect on the magnitude of estimate revisions for Nordstrom’s fiscal years 2010 and 2011 has been weighed more on the negative. Over the last 30 days, estimates for fiscal years 2011 and 2012 have decreased by 2 cents and 4 cents, respectively. However, there has been no movement in estimates for the two upcoming quarters.

Our Recommendation

Nordstrom currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, our long-term recommendation remains Neutral.

Nordstrom is one of the leading players in the highly fragmented specialty retail sector. The company offers a wide array of over 500 brands, targeted at the entire family, through a strong countrywide network of 196 stores located across 28 states.

Furthermore, a strong line-up of globally recognized brands, catering primarily to the upscale segment, enables Nordstrom to generate high-margin revenue. Consequently, this provides a competitive advantage to the company and bolsters its well-established position in the market.

Nordstrom’s operations are based on a variable cost business model with about 40% to 45% of selling, general and administrative expenses variable in nature. This flexible cost structure not only helps the company to mitigate the impact of sluggish sales trends on margins, but also enables it to quickly capitalize on emerging opportunities when market conditions recover. Consequently, Nordstrom can expect a steady improvement in profitability moving forward.

However, unfavorable macroeconomic conditions in the U.S. has compelled customers to cut back on discretionary spending, preferring lower priced products over premium ones. This is especially a matter of concern for Nordstrom as its business strategy is skewed more toward upscale offerings.

The company operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players such as Gap Inc. (GPS), Limited Brands Inc. (LTD) and Abercrombie & Fitch Co. (ANF).

NORDSTROM INC (JWN): Free Stock Analysis Report

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