There are several stocks with huge potential that investors might miss, and Nordstrom Inc. (JWN, Financial) is one of them. The company has posted mixed quarterly results, including a 1.35% decrease in total revenues. For the six months, net sales increased 1.04% and total revenues decreased 0.29%.
Nordstrom is a leading fashion specialty retailer that offers apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. This 115-year-old growth company now operates 329 stores in 39 states, including 121 full-line stores in the U.S., Canada and Puerto Rico; 200 Nordstrom Rack stores; two Jeffrey boutiques and one clearance store.
Nordstrom also serves its customers online through Nordstrom.com, Nordstromrack.com and HauteLook. The company owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its five clubhouses.
Mixed second quarter results
On Aug. 11, the Seattle-based company reported its financial results for the second quarter. The company’s total revenues decreased 1.35% to $3.65 billion, compared to $3.70 billion for the comparable prior-year period. Net sales for the reported quarter decreased 0.28% to 3.59 billion compared to $3.6 billion in the year-ago quarter.
Net sales (which includes U.S. and Canada full-line stores and Nordstrom.com, and Trunk Club) in the Nordstrom brand decreased 0.4% and comparable sales decreased 2.3%. In the Nordstrom Rack brand (which includes Nordstrom Rack stores and Nordstromrack.com/HauteLook), net sales increased 11.2% and comparable sales increased 5.3%.
Nordstrom’s net earnings decreased 44.55% to $117 million, compared to $211 million for the same period prior year. The company’s diluted EPS decreased 38.53% to $0.67, compared to $1.09 in the year-ago quarter. Selling, general and administrative expenses increased 7.42% to $1.07 billion, compared to $997 million in the year-ago quarter.
Nordstrom’s EBIT in the reported quarter decreased 41.38% to $221 million compared to $377 million in the fiscal 2015 comparable period. Further, gross profit, as a percentage of net sales, of 34.3% decreased 101 basis points compared with the same period in fiscal 2015, due to increased markdowns to align inventory to current trends and higher occupancy expenses related to new store growth.
The company’s ROIC for the 12 fiscal months ended July 30 was 9.1% compared to 12.3% in the prior 12-month period. The reason behind this decrease was reduced earnings.
Nordstrom ended the quarter with cash and cash equivalents of $892 million (an increase of 110.87% compared to $423 million for the comparable prior-year period) and net long-term debt of $2.77 billion (a decrease of 1.42%, compared to $2.81 billion for the comparable prior-year period).
A glimpse into six months performance
| Metrics | Six months ended July 30 | Six months ended Aug. 1, 2015 | % change |
| Total revenues | $6.9 billion | $6.92 billion | (0.29)% |
| Net sales | $6.78 billion | $6.71 billion | 1.04% |
| Net earnings | $163 million | $339 million | (51.92)% |
| EBIT | $327 million | $622 million | (47.43)% |
| Selling, general and administrative expenses | $2.11 billion | $1.97 billion | 7.11% |
| Net cash from operating activities | $853 million | $415 million | 105.54% |
Share repurchase and store count
Nordstrom repurchased 1.3 million shares of its common stock for $60 million during the six months ended July 30. Further, a total capacity of $751 million remains available under its existing share repurchase board authorizations.
To date in fiscal 2016, Nordstrom has relocated one full-line store and opened six Nordstrom Rack stores. The company’s total store count has increased to 329, compared to 304 in the fiscal 2015 comparable period.
Dividend
On Aug. 17, Nordstrom’s board of directors has approved a quarterly dividend of 37 cents per share payable on Sept. 13.
Projections
Based on its earnings release, Nordstrom has updated its guidance for fiscal 2016. The company expects its total sales and comparable sales will increase by 2.5% to 4.5%, and (1)% to 1%. Nordstrom expects that its retail EBIT will decrease by 10% to 15%, and credit EBIT will be approximately $80 million. The company further expects that diluted EPS will lie in the range of $2.60 to $2.75.
Growth strategy
Nordstrom’s three main initiatives are:
- Expanding reach.
- Brand collaborations.
- Digital experience.
Nordstrom is focused on expanding its business in Canada as it has $1 billion sales potential. The company plans to open two stores in Toronto, 15 new Rack stores and a second full-line store.
For digital experience, Nordstrom is integrating store and online experience. Further, the company is enhancing its mobile (new mobile app features include store mode and visual search) and web designs.
For further productivity, Nordstrom has initiated the following:
- Modernizing technology platform.
- Implementing initiatives to improve operating performance.
- Realigning marketing efforts with focus on customer journey.
- Streamlining corporate headquarters.
Long-term expectations
Nordstrom expects its sales will reach more than $20 billion by 2020. Further, the company expects the following:
- High single-digit growth.
- Mid-teens ROIC.
- Improving capital turns.
- Improving free cash flow.
- Narrowing gap between sales and earnings growth.
- CAPEX approximately 5% of sales.
Capital deployment
Nordstrom has provided its five-year (2016-2020) capital plan. Expected capital will be $3.6 billion (approximately 4% of sales). The company’s allocation of capital are here under:
- New stores and relocations: 14%.
- Remodels and maintenance: 24%.
- Canada and Manhattan: 24%.
- Technology and supply chain: 38%.
(Source: Company website)
On a concluding note
Overall, Nordstrom is a rock-solid company with good cash flow from operations, remarkable return on equity, and compelling balance sheet.
Recently, Nordstrom has announced its partnership expansion plan with Madewell by adding the brand to an additional 20 stores this fall. Finally, with the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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