Shares of Nordstrom, Inc. JWN have lost 8.1% in the past six months as margins remain under pressure due to higher expenses. Notably, increased occupancy expenses with regard to store openings, higher SG&A and pre-opening expenses have been dampening margins. Investments related to technology, supply chain and marketing initiatives are added deterrents. However, the stock has outperformed the industry that declined 22.8% in the same time frame.
In the third quarter of fiscal 2018, gross margin contracted 137 basis points mainly on account of unfavorable timing shift from the impact of the revenue recognition standard and off-price mix. Higher cost of sales along with increased buying and occupancy expenses resulted in higher SG&A expenses that grew 9.2% in the same quarter. Rise in supply chain costs, reflecting improved fulfillment and delivery expenses in relation to digital growth might further weigh on margins and profitability.
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Nordstrom’s credit-card interest-related error in the most recent quarter has also hurt investors’ sentiments. Although the company expects to refund less than 4% of its cardholders amounts (less than $100), this might result in higher expenses and weigh on profitability.
Can Nordstrom’s Strategies Help Lift Stock?
Nordstrom’s robust omni-channel initiatives and superb surprise history appear promising. Also, the company’s customer-based strategy that focuses on leveraging its brand strength, provides excellent services and offers compelling products is commendable.
Furthermore, management remains committed to boost the e-commerce and digital networks and simultaneously focus on its store-expansion strategy. In the last reported quarter, the company registered 20% growth in digital sales. Meanwhile, Nordstrom’s generational investments in new markets and digital businesses remain sturdy and contributed roughly 50% to sales growth.
In Canada, Nordstrom has been progressing well with its expansion by opening three Rack stores and is on track to open three more outlets in fiscal 2018. In fact, the company envisions sales of $1 billion from its expansion in Canada by 2020. Management remains keen on domestic store expansion as well. Apparently, it opened two Rack stores in the United States and remains on track to open four stores in the current fiscal year.
Nordstrom’s customer-based strategy, which positions it well to reach the long-term revenue target of $20 billion by 2020, is an added positive. The company is making amendments to its operating model in response to the constant slowdown in mall traffic resulting from customers’ shift to online shopping.
With regard to cost savings, Nordstrom plans to strike a balance between its sales and expense growth. We believe all these efforts will help the company deliver sustainable growth in the future.
Robust Surprise Trend & Raised FY18 View Hold Optimism
In the third quarter of fiscal 2018, Nordstrom delivered ninth earnings beat in the trailing 10 quarters and fifth positive sales surprise in the last six quarters.
Despite strained margin, management raised its sales view for fiscal 2018 as well as the lower end of the earnings per share guidance. Net sales are projected to be $15.5-$15.6 billion, up from $15.4-$15.5 billion guided earlier. Adjusted earnings per share are envisioned to be $3.55-$3.65 for fiscal 2018 over the prior guidance of $3.50-$3.65.
Nordstrom currently has a Zacks Rank #3 (Hold).
Here Are Some Better-Ranked Retail Stocks for Your Portfolio
Abercrombie & Fitch Co. ANF delivered average positive earnings surprise of 88.6% in the last four quarters. Moreover, the company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Boot Barn Holdings, Inc. BOOT is also a Zacks Ranked #1 stock, which has an impressive long-term earnings growth rate of 23%.
Canada Goose Holdings Inc. GOOS outpaced the earnings estimates in each of the trailing four quarters by an average surprise of 83.2%. It currently carries a Zacks Rank #2 (Buy).
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