Nordstrom on Thursday reported that total company net sales rose 2% to $3.5 billion for the third quarter, compared with the same period in fiscal 2016. Same-store sales in the quarter fell a greater than expected 0.9%, versus the Retail Metrics consensus estimate emailed to Retail Dive for a 0.5% decline. E-commerce sales rose 14% year over year at Nordstrom.com and 26% at Nordstromrack.com/HauteLook, according to a company press release.
Q3 earnings were 67 cents per diluted share, beating the consensus of 64 cents from Retail Metrics, representing the department store’s sixth straight earnings beat. Earnings suffered a reduction of some 4 cents from hurricanes affecting stores in Puerto Rico, Florida, and Texas, according to the release. The estimated lost sales impact from the hurricanes was approximately $20 million, or 60 basis points, the company said. Retail gross profit, as a percentage of net sales, was 34.7%, a 12 basis points contraction from the same period last year, mostly from higher occupancy expenses related to new store growth for Nordstrom Rack and Canada.
By banner, the Nordstrom brand, (including U.S. and Canada full-line stores and Trunk Club and Nordstrom.com), net sales in the quarter fell 1.2% and same-store sales fell 1.9%, the company said, with the top-ranking merchandise categories being men's and kids' apparel. At Nordstrom Rack, (Nordstrom Rack stores and Nordstromrack.com/HauteLook), net sales in the quarter rose 5.5% and same-store sales rose 0.8%. The West was the top-ranking geographic region for both brands, the company said.
Nordstrom swung to a profit in the third quarter, but investors sent shares down about 7% late Thursday as investors noted some stall in the growth of its better-performing off-price Rack brand, as well as pressure on margins.
"Total [same-store sales] of down 0.9% met our estimate, but the complexion was slightly different with digital sales better and Rack stores coming in softer," according to a note from Gordon Haskett analyst Chuck Grom emailed to Retail Dive. "All told, we remain fans of the Nordstrom concept, but with limited visibility on the direction retail EBIT margins over the next few years (i.e. will the team continue to actively invest, thereby compressing EBIT margins) the stock is likely to sit in a holding pattern, in our opinion."
Merchandising at Rack was an issue in the third quarter, co-president Blake Nordstrom told analysts, according to a transcript from Seeking Alpha, but that's been corrected, with positive results, since. "In any retail business, it’s critical obviously to have the best merchandise and good values," he said. "It’s particularly true in an off-price. And having plans that were now in hindsight too aggressive caused our teams to have to pull back a little bit."
Nordstrom has long enjoyed a reputation for innovation and customer service that for years seemed to set it apart. The retailer continues to experiment within the beleaguered department store space, with moves like its merchandise-free "Local" store in Los Angeles and mobile services like its Reserve Online and Try In-Store service, recently expanded to more than 50 stores across the country.
Without the kind of over-expansion undertaken by Macy's, the company has also been able to focus on its strategy more fully, cutting costs, rationalizing its e-commerce merchandising and pricing, and refining (as opposing to shredding) its brick-and-mortar footprint. Plus, it is way ahead in the off-price game, having opened its first Nordstrom Rack store in Seattle in 1975, and accelerating its growth strategy of late. The retailer is "absolutely by far the best at outlet," according to Shelley E. Kohan, VP of retail consulting at store analytics firm RetailNext.
But its third quarter results complicate its holiday fortunes as well as its hopes for a go-private deal that could help a turnaround out of the glare of Wall Street. For now, Nordstrom told analysts on Thursday that the company is focused on the holidays.
"We’ve invested in key categories and brands that resonate most with our customers. This includes expanding our online selection and fulfillment capacity to support the peak volumes that we expect during the holidays," he said. "To make shopping faster and easier, we offer in our full-line stores Buy Online Pick up In-store with an option for curbside services. Also, in several markets, we have available Reserve Online and Try In-Store and same-day delivery services. Next month, we’ll offer 24-hour curbside pickup in major markets, including Seattle, Chicago, Dallas, and San Diego. During this holiday period, we believe the strength of our digital capabilities along with our local market assets, our people, product, and place represent a significant competitive advantage in serving our customers."
Indeed, Nordstrom also announced that 10 stores across the country will offer curbside pickup around the clock, seven days a week between Dec. 16 and 24, and at select stores leading up to the holidays, according to a press release emailed to Retail Dive.