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Despite reporting solid top-line growth, the upscale department store operator Nordstrom Inc.’s (JWN) first-quarter 2012 earnings of 70 cents per share missed the Zacks Consensus Estimate of 75 cents. However, quarterly earnings were higher than the prior-year period earnings of 65 cents per share.

Quarter in detail

Nordstrom’s same-store sales and top-line trends were encouraging for the quarter. Total revenue grew 13.2% to $2,629 million from $2,323 million in the prior-year period and surpassed the Zacks Consensus Estimate of $2,591 million. The year-over-year top line growth was primarily driven by robust performance of the company’s e-commerce business along with the customer loyalty program, including Fashion Reward points on lower spending.

Nordstrom’s net sales (including full-line and direct businesses) increased $191 million or 10.8% year over year. Total sales at Nordstrom Rack increased $91 million, or 19.6% from the year-ago quarter. However, the company’s credit card revenue remained flat year over year at $94 million. Nordstrom now expects 2012 credit card revenue to increase in the range of $0.0 to $10.0 million.

Nordstrom’s e-commerce retail revenue grew a whopping 44.2% from the prior-year period level. In September 2011, the company took several steps to boost its web-based retail revenue, including free shipping on online purchases and free return shipping too.

Total same-store sales for the quarter grew 8.5%. Moreover, Nordstrom’s same-store sales (including full-line and direct businesses) jumped 9.3%, driven by the robust performance in Designer, Handbags, Women’s and Men’s shoes categories. Besides, full-line same-store sales increased 5.6% on the back of strong performances in the Midwest and the South regions. Same-store sales at Nordstrom Rack increased 6.8%.

However, due to free shipping on online purchases and increased expenses related to the Fashion Rewards program, Nordstrom’s gross profit, as a percentage of sales, contracted 31 basis points (bps).

Further, retail selling as well as general and administrative expenses increased 18% to $721 million in the quarter, primarily due to increased operating expenses as well as higher volume of sales and various customer loyalty program expenses. However, credit selling, general and administrative expenses declined 20% year over year to $44 million.

Consequently, Nordstrom’s operating income stood at $280 million compared with $272 million reported in the prior-year period, while operating margin contracted 100 bps to 10.7%.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $1,647 million compared with $1,433 million at the end of first quarter 2011. Long-term debt (including current portion) at the end of the quarter stood at $3,143 million. During first-quarter 2012, Nordstrom generated $159 million and $70 million in cash from operations and free cash flow, respectively. The company incurred $98 million in capital expenditure, spent $57 million to repurchase shares and $56 million for dividend payment.

Guidance

The company maintains its fiscal 2012 earnings guidance at $3.30-$3.45 per share, based on total same-store sales growth of 4% - 6%. However, gross margin is anticipated to decrease 5 to 35 basis points. Further, management is planning to incur $275 million to $340 million in retail selling, general and administrative expenses, majorly in enhancing e-commerce capabilities. The current Zacks Consensus Estimate is pegged at $3.41 per share.

Our Take

We believe that the upscale department store operator will continue to report better financial results in the near future. The company will continue to attract more shoppers with its different mediums of sales channel as well as offers. Moreover, the recent acquisition of online private sale leader HauteLook Inc. will facilitate Nordstrom to further increase its direct business capabilities, implement an enterprise-wide inventory management system, and sell directly to online customers while enhancing customer services, which in turn, will boost its profitability.

Moreover, in a move to supplement its e-commerce division, Nordstrom has entered into a partnership with the largest online clothing brand Bonobos Inc. Launched in 2007, Bonobos sells best-selling washed Chinos and colorful spring options, exclusively online.  Following the announcement, Nordstrom stores will now feature the Bonobos assortments, while it will also sell Bonobos merchandise online through Nordstrom.com.

Based in Seattle, Washington, Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, as well as a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.

However, Nordstrom operates in a highly fragmented specialty retail sector and faces intense competition from other well-established players, such as The Gap Inc. (GPS) and Limited Brands Inc. (LTD). The company primarily competes on the basis of fashion, quality and service.

Nordstrom's shares maintain a Zacks #2 Rank, which translates into a short-term 'Buy' rating. Our long-term recommendation on the stock remains 'Neutral'.

 
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