In an unexpected turn of events, Nordstrom’s stock (JWN) saw an impressive 6% surge late Thursday, following the release of the company’s recent earnings report and same-store sales data. Despite a year-on-year sales drop of 8.3% for the same period, the company managed to exceed market expectations, attributing the sales decline, in part, to the timing of its Anniversary Sale, which shifted into the third quarter. The company’s decision to wind down its Canadian operations during the quarter also played a role in the sales slump.

The company’s off-price business, Nordstrom Rack, outperformed its flagship brand stores, with a 4.1% fall compared to an 11.9% drop recorded in the first quarter. Nordstrom’s resilience in the face of adversity is underscored by their unwavering stance on their 2023 outlook, despite acknowledging the potential impact of inflation and higher interest rates on discretionary consumer spending in the second half of the year. CFO Catherine Smith’s cautious yet optimistic tone on the investor call post-results indicates the company’s readiness to navigate the uncertain retail landscape.

Nordstrom’s Q2 Earnings Surpass Estimates Despite Sales Decline

Leading fashion retailer, Nordstrom (JWN), saw its stock rise by 6% in after-hours trading on Thursday, following the announcement of its Q2 earnings which surpassed market expectations. This is despite the recorded 8.3% drop in sales compared to the same period last year.

Sales Decline and Earnings Beat

Nordstrom’s CEO, Erik Nordstrom, attributed the decline in sales to the scheduling of its Anniversary Sale which occurred a week into the third quarter rather than the second, and the winding down of the company’s Canadian operations. If these factors were discounted, the sales would have dropped by 4%. Remarkably, the company’s Nordstrom Rack stores outperformed its flagship brand stores, with a sales decline of 4.1% compared to an 11.9% drop in the first quarter.

The company’s Q2 results exceeded Bloomberg’s estimates, with net sales of $3.66 billion against an expected $3.61 billion, and an adjusted EPS of $0.84 against an expected $0.44. Segment revenue also beat estimates, with Nordstrom generating $2.49 billion and Nordstrom Rack generating $1.17 billion, against expected revenues of $2.47 billion and $1.10 billion respectively. Credit card revenue, however, fell short of the $107.35 million expectation, coming in at $100 million.

Future Outlook and Consumer Behavior

Despite the sales drop, the company maintained its 2023 outlook. It expects a 4-6% drop in retail sales and credit card revenues compared to last year, with adjusted earnings projected to be between $1.80 and $2.20, excluding charges related to the closure of its Canadian business.

The company’s CFO, Catherine Smith, stated during an investor call that consumers are still exercising caution due to uncertainties around inflation and higher interest rates. These factors could potentially affect discretionary consumer spending in the second half of the year, particularly during the holiday season.

Inventory, Credit Card Revenue, and Theft Concerns

Inventory management was a key issue for Nordstrom in Q2 2022, which saw a 17.5% drop compared to last year. However, Erik Nordstrom assured that the company is focused on managing inventory with greater discipline by improving mix and productivity.

Credit card revenues increased by 10% in the first half of the year, driven by Nordstrom’s credit card partner agreement and lower-than-expected credit card losses. Yet, there are concerns about rising delinquencies which are now above pre-pandemic levels and could result in higher credit losses in the future.

Addressing recent concerns about retail theft, particularly following a "flash rob" at a Nordstrom location in California, Erik Nordstrom admitted that the incident was "unacceptable" but within the company’s plans. He stated that the company had not seen an increase in shrinkage beyond what was expected but emphasized the need for "better solutions" in collaboration with legislators and law enforcement.

Takeaways

Nordstrom’s Q2 results present a mixed picture. While the company managed to beat earnings estimates, it still grapples with sales decline and cautious consumer spending. The company’s ability to manage inventory, control credit losses, and address retail theft will be critical in steering its future performance.