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Falling Store Traffic Pummels Nordstrom Q3 Results

Upscale department and off-price store operator Nordstrom, Inc. (JWN) reported third quarter sales and earnings results that missed Wall Street estimates and tempered its earnings guidance for the fourth quarter and fiscal year, sending its stock swooning by more than 20 percent in after-hours trading.

In the three months ended Oct. 31, total company sales increased 6.6% to $3.2 billion, about 5 percent shy of analyst expectations of $3.38 billion.

On the quarterly earnings conference call, the company reported “a sequential slowdown in sales trends” beginning in August and continuing through the quarter that was generally consistent across channels and merchandise categories, and that seemed to be rooted in a decrease in brick-and-mortar traffic.

CEO Blake Nordstrom told analysts, “We have positive economic indicators, but the customer is voting with his or her dollars, and is playing them closer to the vest.”

Total company comparable sales rose 0.9%. Comparable sales at full-line stores and, where the top performing category in the quarter was cosmetics, increased 0.3%. Other women’s apparel categories, like coats, younger customer focused departments like Topshop, Madewell and Brandy Melville, as well as dresses, continued to show strength. No particular merchandise category underperformed the company average.

Full-line net sales of $1.6 billion decreased 1.9%, and comparable sales fell by 2.2%. net sales increased 11 percent, however, reflecting continued expansion of merchandise selection.

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Net sales in the off-price business increased by 12 percent compared with the same period last year. Nordstrom Rack net sales of $0.9 billion increased 8.4%, but comparable sales decreased 2.2%. net sales increased 39 percent, continuing to outperform expectations.

Gross profit of $1.1 billion, or 33.9% of net sales, fell 163 basis points from the prior year period, due to higher markdowns in addition to the planned impact of higher occupancy costs related to store growth and the increased mix of Nordstrom Rack.

Inventory grew by 8 percent in the period, slightly faster than sales.

During the third quarter, the company opened three new full-line stores, including its first international flagship store in Vancouver, B.C., relocated a full-line store, and opened 16 new Rack stores. To date in fiscal 2015, Nordstrom opened five full-line stores, relocated one full-line store and opened 27 Nordstrom Rack stores. As of the end of October, the company operated 323 stores, 121 which are full-line, and 194 Rack.

On Oct. 1, the company sold its credit card portfolio to TD Bank for $2.2 billion. Nordstrom will split the net proceeds of $1.8 billion to shareholders as a special $4.85 per share cash dividend and to buy back shares in the fourth quarter.

The company adjusted its earnings guidance downward for fiscal 2015, reflecting sales growth of 7.5% to 8 percent instead of 8.5% to 9.5%. Comps are now expected to increase by 2.5% to 3 percent, down from 3.5% to 4.5%. Earnings per share are now expected to be $0.55 per share lower than the previously expected range of $3.85 to $3.95.

Despite the sluggish consumer shopping patterns, the company remains positive about its ability to delight customers.

Jamie Nordstrom, president of stores, said, “We are optimistic that our customer is going to respond to what we put forth in the next couple of months.”