Seattle—Shares of Nordstrom Inc. edged downward in early trading this morning after the luxury retailer reported a lower-than-expected first quarter profit on Thursday.
For the quarter ended April 28, Nordstrom posted a 2.9% increase in its net income to $149 million, or 70 cents a share, compared with $145 million, or 65 cents a share, a year ago. Analysts’ average estimate expected 75 cents a share.
Total sales rose rose 13.7% to $2.53 billion, just missing analysts’ estimate for $2.55 billion. Comparable store sales were up 8.5%. Top performing categories included handbags, women’s shoes and men’s shoes.
The company’s Direct channel, which includes online, continued to show strong sales growth with an increase of 44.2% “significantly outpacing the overall company performance and reflective of the company’s multiple initiatives under way in e-commerce.”
In a conference call with analysts, Blake Nordstrom, president, explained some of the initiatives to help e-commerce sales.
“We made enhancements to our websites to improve things such as navigation and graphics and make the checkout process faster and easier,” he said. “We increased the selection of merchandise in a number of online departments and added to the functionality of our mobile apps. We increased the speed of fulfillment and delivery, while making returns easier. These types of initiatives are ongoing, and the benefits of these efforts are reflected in the continuing strong top-line growth we’re seeing in our direct channel.”
At full-line Nordstrom stores, comparable store sales grew 5.6%. The South and Midwest regions were the top performing geographic regions.
Nordstrom Rack posted a 19.6% increase in net sales to $91 million with comparable store sales up 6.8%.
Online Investment to Keep Ahead of Amazon?
The increase in Nordstrom’s direct sales were no doubt helped by its new free shipping policy, Fashion Rewards program, etc, but retail analysts said those improvements came with a cost: expenses related to sales support climbed 18% to $721 million, and gross profit as a percentage of sales contracted 31 basis points.
Consequently, Nordstrom’s operating income stood at $280 million compared with $272 million reported a year ago while operating margin contracted 100 bps to 10.7%.
For its full year outlook, Nordstrom reiterated its forecast for earnings of $3.30 to $3.45 with comparable store sales growth of 4% to 6%. That was below analysts’ average estimate for $3.49 per share.
Moreover, retail analysts were further disappointed by Nordstrom’s predicting that its selling and general expenses would rise in the range of $275 million to $340 million.
However, some analysts said Nordstrom is smart to invest in its e-commerce activities from its HauteLook flash sales site to its store e-commerce sites to compete with Amazon which is aggressively expanding its fashion and apparel offerings.
Dan Geiman, analysts at McAdams Wright Ragen in Seattle, said he foresees Nordstrom continuing to invest through the second quarter “and then even out.”
“You’re seeing Amazon increasingly nipping at their heels, and that’s something Nordstrom has to be aware of,” Geiman said. “Amazon’s becoming a bigger threat for Nordstrom, as it basically is for all retailers.”