Nordstrom reported earnings before interest and taxes (EBIT) slid 4.9 percent in the fourth quarter due to soft sales at its full-price stores that led to markdown pressures.

Earnings in the quarter ended February 2 were generally in-line with the company’s updated expectations provided in its holiday sales release on January 15, 2019. At that time, Nordstrom said EPS for the year was expected to be around the low end of the company’s prior outlook range of $3.27 to $3.37, including the third quarter estimated non-recurring credit-related charge of 28 cents, or for comparability, $3.55 to $3.65, excluding the impact of the charge.

Net sales in the quarter decreased 4.7 percent, or increased 0.1 percent excluding the 53rd week in 2017 of approximately $220 million. Comparable sales, which were not impacted by the 53rd week, increased 0.1 percent.

For fiscal 2018, earnings per diluted share was $3.32, which included a $0.05 favorable income tax benefit related to prior periods and an estimated non-recurring credit-related charge of $0.28. Net sales for fiscal 2018 increased 2.3 percent, or 3.8 percent excluding the 53rd week. Comparable sales increased 1.7 percent.

In 2018, the company achieved the following milestones in executing its customer strategy:

  • Approximately 10 million customers, or one-third of total customers, shopped across multiple channels, which leads to higher customer spend. This represents an increase of 6 percent.
  • Nordstrom’s combined physical and digital presence represents a competitive advantage in offering customers a differentiated experience. Digital sales increased 16 percent and made up 30 percent of sales.
  • Nordstrom launched its local market strategy, which drove outsized market share gains in Los Angeles and increased product selection, delivery speed and convenience for customers.
  • Generational investments continued to scale, contributing approximately $2 billion in sales and improvement in profitability. Nordstromrack.com/HauteLook exceeded $1 billion in sales. Trunk Club delivered sales growth of 35 percent.
  • The company opened its Men’s Store in New York City and furthered its expansion into Canada with the introduction of six Nordstrom Rack stores.
  • Nordstrom maintained a strong financial position, generating annual operating cash flow in excess of $1 billion for 10 consecutive years and returning $1 billion to shareholders in 2018.

Fourth Quarter Summary

  • Fourth quarter net earnings were $248 million compared with $151 million during the same period in fiscal 2017. This increase was primarily due to lower income tax expense associated with corporate tax reform.
  • Earnings before interest and taxes (EBIT) was $333 million, or 7.6 percent of net sales, compared with $350 million, or 7.6 percent of net sales for the same period in fiscal 2017.
  • In Full-Price, comparable sales decreased 1.6 percent, primarily driven by softer traffic trends in full-line stores. Off-Price sales reflected continued momentum with a comparable sales increase of 4.0 percent, in-line with the company’s expectations.
  • Gross profit, as a percentage of net sales, of 35.1 percent decreased 33 basis points compared with the same period in fiscal 2017, primarily due to higher markdowns taken in response to softer Full-Price sales trends and an elevated promotional environment. Ending inventory decreased 2.4 percent from last year.
  • Selling, general and administrative expenses, as a percentage of net sales, of 29.8 percent decreased 23 basis points compared with the same period in fiscal 2017, primarily due to a one-time employee investment of $16 million associated with last year’s tax reform. The company demonstrated disciplined expense execution, reflecting an improvement in expense rate relative to its expectations.

Full Year Summary

  • Full year net earnings were $564 million compared with $437 million for fiscal 2017. This increase was primarily due to lower income tax expense associated with corporate tax reform.
  • EBIT was $837 million, or 5.4 percent of net sales, compared with $926 million, or 6.1 percent of net sales, for fiscal 2017. Excluding an estimated non-recurring credit-related charge of $72 million in 2018, EBIT as a percent of net sales, was 5.9 percent.
  • In Full-Price, comparable sales increased 0.9 percent. In Off-Price, comparable sales increased 3.5 percent.
  • Gross profit, as a percentage of net sales, of 34.4 percent decreased 26 basis points compared with fiscal 2017 largely due to higher Full-Price markdowns in the fourth quarter.
  • Selling, general and administrative expenses, as a percentage of net sales, of 31.5 percent increased 65 basis points compared with fiscal 2017. Excluding an estimated non-recurring credit-related charge of $72 million, expenses increased 19 basis points. Annual expense growth moderated to 4 percent driven by ongoing productivity improvements in digital capabilities.

Fiscal Year 2019 Outlook

Nordstrom remains committed to achieving its long-term financial targets, which support three strategic objectives in driving shareholder returns: continuing market share gains, improving profitability and returns, and maintaining disciplined capital allocation. The company’s expectations for fiscal 2019 are as follows:

  • Net sales growth 1 percent to 2 percent
  • Credit card revenues Mid to high single-digit growth
  • EBIT $915 to $970 million
  • EBIT margin 5.9 percent to 6.1 percent
  • Earnings per diluted share (excluding the impact of any future share repurchase) $3.65 to $3.90

The company’s guidance also incorporates the following assumptions:

  • The company measures its performance through market share, customers, and net sales metrics. As comparable sales growth is expected to approximate net sales growth in 2019, the company will only be reporting net sales growth.
  • The effective tax rate is expected to be approximately 26 percent.
  • Estimated annual average outstanding shares are expected to be approximately 162 million, which excludes the impact of any future share repurchases.