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Last week was an ugly week for department-store stocks. Retail stocks have rallied this year, leading to high expectations among investors. As a result, the market has reacted negatively to even the slightest disappointments in department stores' third-quarter earnings reports.
Nordstrom (NYSE: JWN) and Dillard's (NYSE: DDS) felt the biggest impact from this phenomenon. Dillard's stock plunged 19% last week; Nordstrom plummeted 22%.
Nordstrom and Dillard's Weekly Stock Performance data by YCharts.
Let's take a look at the Q3 results that Dillard's and Nordstrom reported last week -- and whether the sharp declines in their share prices were justified.
Dillard's posts another subpar earnings report
Last quarter, Dillard's posted a solid 3% comp-sales increase. However, weaker second-quarter results caused it to enter the period with too much inventory. As of the end of Q2, inventory was up 5% year over year, even though comp sales rose just 1% in the second quarter.
This inventory overhang weighed on Dillard's gross margin last quarter, particularly during the first month of the fiscal quarter. Retail gross margin fell 87 basis points (0.87 percentage points) year over year. As a result, Dillard's adjusted earnings per share plunged to $0.16 from $0.41 a year earlier.
Considering that analysts had on average expected Dillard's EPS to reach $0.56 last quarter, it's not surprising that the stock tumbled. However, there were some bright spots in the earnings report. For one thing, results improved as the third quarter progressed. Additionally, Dillard's ended the quarter with inventory up just 2% year over year on a comparable basis, which puts it in position to be more successful during the holiday quarter.
Nordstrom investors get some unwelcome surprises
Comp sales rose 2.3% at Nordstrom last quarter: a slowdown relative to the 4% increase it achieved in the second quarter. Its off-price division delivered a stellar 5.8% comp-sales gain, but this was offset by a modest 0.4% increase for the full-line side of Nordstrom's business.
Nordstrom's off-price business gained momentum last quarter. Image source: Nordstrom.
The timing of Nordstrom's big Anniversary Sale -- which mainly fell during the second quarter this year -- had a significant negative impact on its full-line results last quarter. Management noted that for the second and third quarters combined, Nordstrom posted a respectable 2.5% uptick in full-line comp sales. Nevertheless, investors were clearly disappointed by the slowdown in Nordstrom's full-line growth.