Nordstrom Inc. reported earnings per diluted share for the third quarter ended November 3, 2018 of 39 cents, which reflected a non-recurring estimated credit-related charge of 28 cents. Excluding this estimated charge, which was not incorporated in the company’s prior outlook, earnings slightly exceeded the company’s expectations, reflecting continued top-line strength across its Full-Price and Off-Price businesses.
Earnings before the charge came in at 67 cents a share, a penny ahead of Wall Street’s consensus estimate of 66 cents.
Total company net sales increased 3.0 percent for the third quarter ended November 3, 2018 compared with the quarter ended October 28, 2017. This included an unfavorable timing shift of approximately 100 basis points, primarily from the reversal of the second quarter impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale. Combined second and third quarter net sales, which removes these timing impacts, increased 5.1 percent compared with the same period last year.
Comparable sales are aligned with the 53-week calendar in 2017. Comparable sales increased 2.3 percent in the third quarter, compared with the 13-week period ended October 28, 2017. This reflected a continuation of underlying trends with a year-to-date increase of 2.4 percent.
Nordstrom’s customer strategy is centered on three strategic pillars: providing a compelling product offering, delivering outstanding services and experiences and leveraging the strength of the Nordstrom brand. The company continued to execute on its strategy and long-term financial commitments to drive higher returns to shareholders:
- In serving customers on their terms – how and when they want to shop, the company delivered outsized digital sales growth of 20 percent, which represented 30 percent of sales, on a year-to-date basis.
- Nordstrom’s generational investments in new markets and digital businesses continued to scale, contributing approximately half of the year-to-date net sales increase. The company continued its expansion plans in Canada with three new Nordstrom Rack stores, for a total of six openings this year.
- To normalize for timing impacts related to the Anniversary Sale, Full-Price comparable sales increased by 2.5 percent for the second and third quarters combined, compared with flat comparable sales growth for the same period last year.
- The Off-Price business exceeded expectations with a comparable sales increase of 5.8 percent in the third quarter. The company opened two Nordstrom Rack stores in the U.S., for a total of six new stores this year.
- The company evolved its customer loyalty program with the launch of the Nordy Club in October, which offers enhanced services and a faster earn rate for Nordstrom credit cardmembers. More than 11 million active loyalty customers contributed to 56 percent of total sales on a year-to-date basis.
- The company opened two additional Nordstrom Local neighborhood hubs in the Los Angeles market, in Brentwood and downtown, to provide customers with more convenient access to our services. Nordstrom Local represents an integral part of the company’s local market strategy, which combines the scale of its national infrastructure with its local assets of people, product and place to help reimagine the customers’ shopping experience.
THIRD QUARTER SUMMARY
- Earnings before interest and taxes (EBIT) were $105 million, or 2.9 percent of net sales, compared with $208 million, or 5.9 percent of net sales, during the same period in fiscal 2017.
- EBIT was impacted by a non-recurring estimated credit-related charge of $72 million. This estimated charge resulted from some delinquent Nordstrom credit card accounts being charged higher interest in error. The company has taken action, including the appropriate steps to address this issue and estimates that less than 4 percent of Nordstrom cardholders will receive a cash refund or credit to outstanding balances, with most receiving less than $100.
- Third quarter net earnings were $67 million compared with $114 million during the same period in fiscal 2017. Excluding an after-tax impact of $49 million for the estimated credit-related charge, net earnings were relatively flat. This reflected the reversal of the second quarter impact of the new revenue recognition standard as it relates to the timing of the Anniversary Sale, partially offset by a lower effective tax rate.
- In Full-Price, comparable sales increased 0.4 percent. In Off-Price, comparable sales increased 5.8 percent.
Gross profit, as a percentage of net sales, of 33.3 percent decreased 137 basis points compared with the same period in fiscal 2017. Combined second and third quarter gross profit, which removes the $30 million timing shift of the new revenue recognition standard as it relates to timing of the Anniversary Sale, decreased by 19 basis points compared with the same period last year, primarily due to the mix impact of higher Off-Price growth.
- At the end of the third quarter, inventory increased 7 percent over the same period last year, reflecting timing shifts associated with the holiday season. Excluding this timing impact, inventory growth was relatively in line with sales growth.
- Selling, general and administrative expenses, as a percentage of net sales, of 33.1 percent increased 188 basis points compared with the same period in fiscal 2017. Excluding the estimated credit-related charge of $72 million, selling, general and administrative expenses, as a percentage of net sales, was relatively flat compared with the same period in fiscal 2017. This reflected moderated growth of digital capabilities due to ongoing efforts to drive productivity improvements. Excluding the estimated charge, the company is on track to achieve its plan for mid-single-digit growth in selling, general and administrative expenses for the year.
- During the nine months ended November 3, 2018, the company repurchased 2.9 million shares of its common stock for $157 million. A total capacity of $1,438 million remains available under its existing share repurchase authorization. The actual timing, price, manner and amounts of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission (SEC) rules.
Image courtesy Nordstrom