Upscale department store operator, Nordstrom Inc. (JWN) reported first-quarter fiscal 2013 earnings of 73 cents per share, missing the Zacks Consensus Estimate of 76 cents. However, quarterly earnings rose 4.3% from the year-ago earnings of 70 cents per share.

The company’s earnings in the quarter came in line with the lower end of its projected guidance as prudent inventory and expense management compensated the loss due to lower-than-expected sales volumes.

Total revenue

Nordstrom's same-store sales and top-line trends remained encouraging during the quarter, driven by robust performance at the company's stores. Though the company witnessed weaker sales trends in seasonal merchandise and geographically in the Northeast, Mid-Atlantic and Midwest regions during the first two months of the quarter, sales trends recovered in April.

Total revenue rose 4.7% during the quarter to $2,749 million but fell short of the Zacks Consensus Estimate of $2,813 million. Total revenue for the quarter reflected a 4.8% increase in Net Retail sales to $2,657 million and a 2.2% increase in Credit Card revenues to $92 million.

Comps for the first quarter gained 2.7% on top of the year-ago quarter, comprising flat comps in Nordstrom’s full-line stores, 25% increase in Direct Sales comps and 0.8% increase in Nordstrom Rack store comps.

Moreover, Nordstrom's comps (including full-line and direct businesses) strengthened 3.1% during the quarter, driven by robust performance in Cosmetics, Women’s Apparel and Handbags categories.

Operational Update

Driven by increased occupancy costs related to the expansion of Rack stores along with lower-than-expected sales volumes, Nordstrom's gross profit margin at the retail segment contracted 50 basis points to 37.1% compared with 37.6% in the year-ago quarter. Additionally, the company’s elevated expenses related to the Fashion Rewards program that aims at enhancing customer relations pulled down the gross margin.

Overall, the company reported gross margin of 39.1%, an increase of 60 basis points from 39.7% in the year-ago quarter.

Total selling, general and administrative expenses elevated 5.3% to $801 million in the quarter. However, as a percentage of total revenue, it contracted 15 basis points to 29.14% from the year-ago quarter, mainly due to higher costs incurred for the company’s venture in Canada and its accelerated Rack expansions. During the quarter, the company also recorded a $10 million decrease in the reserve for bad debt that was taken in the first quarter of the year-ago period. Moreover, the company’s ongoing investments in technology and e-Commerce to support online expansion added to its burden.

Consequently, Nordstrom's operating income declined 1.8% to $275 million compared with $280 million reported in the prior-year period, while operating margin contracted 60 bps to 10.0%.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $1,190 million compared with $1,647 million at the end of the year-ago quarter. Long-term debt as of May 4, 2013, stood at $3,119 million. During the first quarter, Nordstrom generated $161 million in cash from operations.

Capital expenditures as of May 4, 2013 were $149 million. During the quarter, the company bought back nearly 3.0 million shares for about $166 million. Currently, the company has about $1.0 billion remaining under its existing share repurchase authorization.

Guidance

Incorporating the first-quarter results, the company now expects fiscal 2013 sales growth of about 4% –6%, compared to its previous forecast of 4.5% – 6.5% growth. Similarly, the company lowered its same store sales guidance for fiscal 2013 to range from 3% – 5%, against 3.5% – 5.5% projected earlier.

However, the company has reiterated its fiscal 2013 earnings per share forecast of $3.65 – $3.80 per share, excluding the impact of future share repurchases. The current Zacks Consensus Estimate is pegged at $3.80 per share.

Moreover, management continues to project selling, general and administrative expenses, as a percentage of sales, to decline 10 to 30 basis points. Further, gross margin is expected to contract between 10 bps and 30 bps year over year.

Our Take

We believe that this upscale department store chain will continue to report better financial results in the near future. It is also expected to continue attracting more shoppers with its various sales channels and offers. Nordstrom currently has a Zacks Rank #3 (Hold).

Other stocks that are performing well in the retail-apparel/shoe sector include Buckle Inc. (BKE), Foot Locker Inc. (FL) and Gap Inc. (GPS), all of which carry a Zacks Rank #2 (Buy).

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