Nordstrom, Inc. reported earnings per diluted share of $0.95 for the second quarter ended Aug. 2, compared with earnings per diluted share of $0.93 for the second quarter ended Aug. 3, 2013. Total company net sales of $3.3 billion for the second quarter increased 6.2 percent compared with net sales of $3.1 billion during the same period in fiscal 2013. Total Company comparable sales for the second quarter increased 3.3 percent.


 

On July 31, 2014, Nordstrom announced that it entered into an agreement to acquire Trunk Club, a personalized clothing service for men. Founded in 2009, Trunk Club delivers a stylist service that combines the convenience of online with a high-touch, personalized shopping experience. Trunk Club is a high-growth company and expects to achieve operational profitability and more than double its annual sales to over $100 million. The Company believes this acquisition represents a natural extension of its core business, aligns with its strategic priorities around a relevant customer experience and accelerates entry into this fast-growing market.

 

 

The Company will acquire Trunk Club for $350 million in Nordstrom stock, a portion of which is retention-based and subject to future vesting. In addition, the transaction includes a long-term management incentive plan of up to $100 million subject to Trunk Club's performance. The transaction is expected to be dilutive to earnings per diluted share for the next several years primarily due to share issuance, performance incentives and amortization of intangibles. The Company estimates the acquisition, including Trunk Club’s projected operating performance, will reduce earnings per diluted share in fiscal 2014 by 3 to 5 percent.

 

 

Trunk Club will operate as an independent, wholly-owned subsidiary and will be managed by its current leadership. The transaction is expected to close in the third quarter, subject to closing conditions including customary regulatory and shareholder approvals.

 

 

SECOND QUARTER SUMMARY


  • Second quarter net earnings of $183 million were comparable to the same period last year. Earnings before interest and taxes were $331 million, or 10.1 percent of net sales, compared with $335 million, or 10.8 percent of net sales, for the same quarter last year. This quarter’s net earnings included planned additional fulfillment and technology investments to improve service and experience across channels and approximately $5 million in incremental infrastructure and pre-opening costs related to the upcoming entry into Canada. 

  • Nordstrom comparable sales, which consist of the full-line and Direct businesses, increased 2.7 percent. Top-performing merchandise categories included Cosmetics, Accessories and Men's Apparel. Nordstrom comparable sales during the Anniversary Sale, which is the Company’s largest sale event of the year, increased 3.6 percent. 

  • Full-line comparable sales for the second quarter decreased 1.2 percent. The Southeast and Southwest regions were the top-performing geographic areas. 

  • Direct net sales increased 22 percent in the second quarter, primarily driven by expanded merchandise selection. 

  • Nordstrom Rack net sales increased $114 million, or 18 percent, compared with the same period in fiscal 2013, reflecting incremental volume from existing stores and the impact of 25 store openings since the second quarter of fiscal 2013. Nordstrom Rack comparable sales increased 4.0 percent.

  • The Nordstrom Rewards loyalty program continues to contribute to overall results, with members shopping more frequently and spending more on average than non-members. The Company opened nearly 370,000 new accounts in the second quarter, an increase of 18 percent compared with the same period last year. With 4.1 million active members, sales from members in the second quarter increased 11 percent in the second quarter and represented 44 percent of sales, from 42 percent for the same period last year. 

  • Gross profit, as a percentage of net sales, of 35.4 percent decreased 7 basis points compared with the same period in fiscal 2013 primarily due to planned occupancy costs associated with Nordstrom Rack’s accelerated store expansion. 

  • Ending inventory per square foot increased 19.2 percent compared with the same period in fiscal 2013, which outpaced the sales per square foot increase of 2.7 percent. The difference primarily reflected planned investments to fuel off-price growth, including increased levels of pack and hold inventory at Nordstrom Rack. The inventory increase also included planned investments in the full-price business to drive online growth and in well-performing merchandise categories. 

  • Selling, general and administrative expenses, as a percentage of net sales, of 28.3 percent increased 66 basis points compared with the same period in fiscal 2013, primarily related to ongoing investments in fulfillment and technology and the planned entry into Canada. In addition, the second quarter of fiscal 2013 included a reduction in variable expenses related to company performance. 

  • During the quarter, the Company repurchased 1.7 million shares of its common stock for $119 million. A total of $359 million remains under existing share repurchase board authorization. The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission rules. 

  • Return on invested capital (ROIC) for the 12 months ended August 2, 2014 was 13.2 percent, which decreased from 14.4 percent for the same period last year. This decrease reflected increased capital expenditures related to store expansion and online growth. A reconciliation of this non-GAAP financial measure to the closest GAAP measure is included below.

 

EXPANSION UPDATE

Nordstrom plans to open three full-line stores (The Woodlands, Texas; Calgary, Canada and Jacksonville, Florida) later this year. To date in fiscal 2014, the Company opened 11 Nordstrom Rack stores and plans to open 16 additional stores during the remainder of the year. In the second quarter of 2014, the Company opened a Nordstrom Rack store in Manhasset, New York.


 







































Number of stores August 2, 2014 August 3, 2013
Nordstrom 117 117
Nordstrom Rack and other 154 131
Total 271 248
Gross square footage 26,442,000 25,567,000

 
FISCAL YEAR 2014 OUTLOOK

Nordstrom updated its annual earnings per diluted share expectations, which incorporates second quarter results and the impact of share repurchases in the second quarter. Nordstrom’s updated expectations for fiscal 2014 are as follows:


The Company updated its annual earnings per diluted share expectations, which incorporates second quarter results and the impact of share repurchases in the second quarter. Nordstrom’s updated expectations for fiscal 2014 are as follows:

 































































Prior Outlook Current Outlook
Net sales 5.5 to 7.5 percent increase 6.5 to 7.5 percent increase
Comparable sales 2 to 4 percent increase 3 to 4 percent increase
Credit card revenues $0 to $5 increase Approximately $10 increase
Gross profit (%) 30 to 50 basis point decrease 40 to 50 basis point decrease
Selling, general and administrative expenses (%) 0 to 20 basis point increase 10 to 20 basis point increase
Interest expense, net Approximately $25 decrease Approximately $25 decrease
Effective tax rate 39.0% 39.0%
Earnings per diluted share, excluding the impact of any future share repurchases $3.75 to $3.90 $3.80 to $3.90
Diluted shares outstanding Approximately 194 million Approximately 192 million

 

 

This earnings per diluted share outlook of $3.80 to $3.90 for fiscal 2014 does not include the acquisition of Trunk Club, which is estimated to reduce earnings per diluted share by 3 to 5 percent.