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Nordstrom Beats Q2 Earnings Forecast, But Full-Line Store Comps Fall

Upscale department and off-price retailer Nordstrom reported that sales in the second quarter of 2014 grew by 6.2% to $3.3 billion, in line with Wall Street expectations. Net income was $183 million, or $0.95 per share, up from $0.93 per share in the prior year quarter, and beating consensus by a penny. Both the average selling price and the number of items sold increased compared to last year on a comparable sales basis.

Sales at stores open at least one year, which includes online sales, increased by 3.3%, consistent with consensus estimates. Cosmetics have been the top Nordstrom comparable store sales category so far this year, followed by accessories and men’s apparel.

Gross profit slipped by 7 basis points to 35.4% in the second quarter, and SG&A expense slipped by 66 basis points to 28.3%.

Comparable sales at Nordstrom’s combined full-line brick-and-mortar stores and e-commerce site grew by 2.7%. Most of the gain was driven by a 22 percent increase in Direct (nordstrom.com) sales. Nordstrom store comps actually fell by 1.2%.  The average selling price and the number of items sold at Nordstrom reportedly increased compared to last year on a comparable sales basis.

Sales at the combined Hautelook/NordstromRack.com division increased 15 percent, underperforming last year’s 23 percent pace.

Total sales at Nordstrom Rack stores grew by 18 percent, or $114 million, in the second quarter.

The company announced it would acquire five-year-old men’s personal shopping e-retailer Trunk Club for $350 million in stock. Trunk Club is a rapidly-growing high-touch business (over $100 million in sales this year) that appeals to a younger upscale menswear customer. Speed to market was a key consideration in the acquisition; the company estimates it might have taken at least a year or two to build such a business from scratch, and it felt the customer-centric culture would fit in well with that of Nordstrom. Long-term management incentives could add another $100 million to the cost of the acquisition.

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In the earnings conference call, EVP and CFO Mike Koppel pointed out that “The [Trunk Club] business delivered positive operating cash flow in 2013 and is on track this year to achieve over $100 million in annual sales and reach operating profitability. With the projected topline increase of roughly 150% in 2014, Trunk club is expected to sustain outsized growth due expansion of its existing channels of Trunk’s showrooms and custom fitting events.” He added that “Trunk Club will be able to immediately scale its business by leveraging our operational capabilities, which include supply chain, greater breadth in inventory and in-store alterations.”

The company operates 117 full-line Nordstrom stores, 151 off-price Rack units, and online stores at nordstrom.com, nordstromrack.com and flash sale site hautelook.com.

Three new Nordstrom full-line stores will open in third quarter (in Houston, Jacksonville and Calgary, the first Canada store), as will a total of 16 new Nordstrom Rack stores. So far this year, the company has opened 11 Nordstrom Rack stores.

The online business is Nordstrom’s fastest growing, and in the second quarter comprised 17 percent of the total business.

Inventory increased by 19 percent on a square footage basis in the quarter, outpacing 3 percent sales growth, largely to accommodate store expansion in the off-price business and as part of its “pack and hold” program in which it sources overstocks from vendors to offer in Rack stores during a future season.