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Over the course of 2015, it seemed consumers had the wind at their back. The steadily improving labor and housing markets, combined with low gas prices, convinced investors the consumer would have more money to spend on discretionary items.
But many retailers, who in theory should have benefited from this higher consumer spending, have missed out. A number of large department stores, including Macy’s (NYSE: M) and Kohl’s (NYSE: KSS), have reported disappointing quarterly earnings this week.
This cast doubt on what, if anything, the consumer was buying with their rising discretionary income. As it turns out, one place they’re still shopping at is Nordstrom (NYSE: JWN).
Nordstrom Sales Beat Expectations
Nordstrom reported second-quarter earnings after the market closed Thursday. The company reported $1.09 in earnings per share on $3.7 billion of revenue. Quarterly net sales increased a very strong 9.2% year-over-year. Comparable sales, which measures sales at stores open at least one year, rose 4.9% last quarter.
Adjusting for one-time gains, Nordstrom’s EPS came in at $0.93, which beat analyst forecasts for $0.90 per share. Total revenue also beat expectations, which called for $3.65 billion.
The quarterly results were very well received by investors. In after-hours trading, shares of Nordstrom popped 5% higher after reporting.
The Keys to Success
There were two primary reasons for Nordstrom’s great quarter. First is its booming e-commerce business. In the smartphone era, consumers are performing an increasing proportion of shopping on their mobile devices, opting for the convenience of online shopping versus going to stores in person.
As such, it’s critical for retailers to adapt to the changing consumer landscape. Building accessible, easy-to-use mobile platforms is a pivotal task, and Nordstrom has done a very good job in that regard. Nordstrom.com sales increased 20%, which management attributed to the steady expansion of merchandise selection.
The other key advantage that helped Nordstrom last quarter was its off-price outlet, Nordstrom Rack. Consumer spending has been shaky to start 2015, and many consumers are scaling down on the pricing ladder.
Sales at Nordstrom Rack grew 13% last quarter, year-over-year. That makes 26 quarters in a row in which Nordstrom Rack reported double-digit sales growth, an impressive accomplishment.
Growth Priorities Going Forward
Going forward, Nordstrom management intends to continue its aggressive expansion of both its online presence and its Nordstrom Rack stores. This is not surprising, since these two factors were the primary reasons for its strong quarter.
Over the first half of the year, the company opened 11 Nordstrom Rack stores, compared to just two full-line stores. It will open 16 Nordstrom Rack stores just in the current quarter.
Because of this, management has high expectations for the rest of the year. Along with its earnings results from last quarter, management updated its forecast for 2015. Management raised the low end of its full-year guidance on sales, from 7%-9% growth to its current outlook of 8.5%-9% growth.
Management also raised its earnings guidance for the full year, to $3.85-$3.95 per share, up from $3.70-$3.80 per share. At the midpoint of its current forecast, Nordstrom stock trades for 19 times 2015 EPS expectations.
At that valuation level, Nordstrom stock isn’t a screaming bargain. But the company is an industry outperformer and is producing growth at higher levels than its competitors. For investors willing to take the risk, Nordstrom could be attractive based on its growth potential.
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