Nordstrom Still Looks Good

Nordstrom Still Looks Good

When a lone boy cries wolf a few times in the dark, we learn a lesson about not lying. When a whole group of people collectively cry out, it might be a good idea to pay attention. Yesterday, Nordstrom added its voice to the chorus of retailers warning of softer sales in at the end of the year. The department store chain increased its second-quarter profit, but still dropped its fiscal-year outlook. Here's what investors need to know about Nordstrom's performance and outlook.

Cutting costs and boosting sales
The 24% year-over-year increase in earnings per share was attributable to two main factors. First, Nordstrom executed a quarter of "disciplined execution of inventory and expenses," which helped boost the company's operating margin. This quarter, Nordstrom managed a 10.8% operating margin, up from 9.9% in the same quarter last year.

The second big factor in the quarter was the shift in the company's annual sale. Last year, it ran in both the second and third quarters, which meant that sales in both periods were affected. Since the whole annual sale period was stuffed into the second quarter this year, the whole revenue boost came all at once. The company said that this will have a negative impact on third-quarter comparisons.

The dropped outlook
Nordstrom's management team believes that same-store sales growth has leveled off at a lower rate than expected. As a result, the company is forecasting that softness through the rest of the year, and now anticipates annual comparable-store sales to increase by only 2% to 3%. While it's clearly disappointing for Nordstrom investors, it's not the first time we've heard this story this week.

Macy's announced a nice increase in earnings while also dropping its full-year outlook. The company cited a change in consumer attitudes as the driver for the decline. CFO Karen Hoguet said that it was Macy's belief that consumers were opting to spend their cash on cars, home improvements, and other non-department-store-based purchases. As earnings season plays out, the truth of that theory should become clearer.

Not to be outdone, Wal-Mart not only revised its forecast, it also posted a drop in comparable sales. The company said that it was feeling the pinch of little to no inflation in the cost of groceries combined with the squeeze of the 2% payroll tax.

The bottom line
Nordstrom seems well poised to finish off the year on track with its newly revised forecast. The business is growing its Rack line and continues to work toward its long-term goal of having 50% of revenue generated by Rack, online, and Canadian sales. While the drop in the comparable-store sales forecast is disheartening, I still have a rosy view of Nordstrom's long-term health and success.

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