Yesterday, Nordstrom announced its quarterly earnings, and investors were disappointed. On almost all fronts, the company fell short of expectations. The miss was driven by a smaller-than-expected increase in comparable-store sales, but the effects were felt across the company. While the setback is frustrating, it's not the end of the line, just yet -- that doesn't mean we can ignore it, though.
The company's spin on the results claimed that they were in line with the low end of the corporate forecast -- that's a stretch. The bottom line was successfully managed through the close eye management kept on inventory and costs, but sales growth was well below expectations.
Comparable sales were forecast to land between 3.5% and 5.5% for the year, but in the last quarter Nordstrom only managed 2.7%. As a result, the company has dropped its full-year forecast to between 3% and 5%. The main drag on this quarter's earnings came from Nordstrom Rack, which doesn't bode well for the future.
Rack has been a huge growth driver for Nordstrom, and the company is actively expanding the line. It has been planning to expand Rack by 15 stores a year. This quarter, comparable sales at Rack inched up just 0.8%, but management was planning for low-single-digit growth. Compare that to last quarter, when Rack managed 7.1% growth in comparable sales.
The fear is that the Rack expansion plan is going to push ahead, but the Rack brand isn't strong enough to support it. This quarter, selling, administrative, and general costs were flat as a percentage of sales, but occupancy and sales costs increased. That imbalance meant that earnings per share rose a mere $0.02, from $0.70 to $0.73.
I said at the beginning that the bad result wasn't going to stop Nordstrom from having a good year, and that's true. The company's Rack expansion comes with risks, but the brand has proven its strength and the new locations should bring new customers to the line.
Nordstrom has kept its earnings-per-share forecast for the full year intact, because it's in a position to manage costs to account for slower sales. The problem is that a continued drop in comparable sales will have a knock on impact for future quarters, when cost management might not be enough.
J.C. Penney is in a position where sales are falling so quickly -- 16.6% in this most recent quarter -- that no amount of cost management can salvage its earnings. Nordstrom is nowhere near that kind of failure yet, but there's a wide range between absolute success and failure. To Nordstrom's credit, the company continues to focus on customers in such a way that it should be able to manage an increase in the coming quarters.
Management's current plan is to recover from the seasonal fall, and CFO Michael Koppel said that the outlook was good. I have no reason to doubt that, and I imagine Nordstrom is going to have a fine year, coming in line with analyst and internal estimates. That's not world-beating, though, and while Nordstrom will survive and thrive, it's no longer as close to the top of my list.
Is this the end for J.C. Penney, or a new beginning?
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The article Nordstrom's Miss Isn't the End originally appeared on Fool.com.
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