JWN Puts Earnings on Discount By Scott Rothbort RealMoney Contributor 5/16/2008 8:05 AM EDT

Nordstrom (JWN) had a decent quarter navigating through a difficult environment. That being said, I cannot reconcile to the after-hours move higher in the stock, although I will note that it has, in the past, moved in one direction in after-hours trading only to do an about-face the next trading day.

The company guided lower, and many of its operating metrics were weaker than expected. Declining inventory counts were the only silver lining in the report. Finally, Nordstrom violates one of my pet peeves: This one happens to be the retailer who tries to boost its bottom line through managing a credit card business.

The report, in my opinion, is not worthy of breaking Nordstrom out of its trading range and will likely invite selling if it gets to the top of that range.

Nordstrom reported first-quarter 2008 EPS of 54 cents on net sales of $1.88 billion. Same-store sales declined 6.5% for the quarter, which was 250 basis points below management's plan.

The strongest regions were in the South, Midwest and Northwest. The best-performing merchandise categories were cosmetics, designer products, women's activewear and intimates.

I want to digress to the Macy's (M) call. On that call yesterday, Macy's declared that the strongest region was Texas, with the weakest areas in Florida and on the West Coast. Women's apparel was the toughest category, whereas men's wear did relatively better, and home goods were mixed.

It appears that the middle- to upper-end retail was a mixed bag and, I would hypothesize, unpredictable.

Gross profit rates declined 57 basis points for the quarter. Inventory per square foot declined 7% year over year. Merchandise margins declined due to lower sales, partially offset by lower expenses. SG&A dollars were below plan but rose 169 basis points due to negative leverage from poorly performing new stores. Retail square footage increased 5% year over year.

The delinquency rate for the credit business increased 59 basis points, to 2.6%, and write-offs increased 110 basis points, to 3.9%. Earnings before interest and taxes from the credit business delivered 5% of company earnings.

Nordstrom repurchased 4.6 million shares at an average price of $36, which impacted EPS by 1 cent per share.

Management revised fiscal 2008 guidance as follows:

• Same-store sales are anticipated at negative 4% to negative 6%, down from the old range of negative 2% to flat.
• The EPS outlook was decreased by 10 cents on both ends of the range, to $2.65 to $2.80 vs. consensus at $2.76.
• Gross profit margins are expected to decline 60 basis points to 90 basis points instead of 30 basis points to 60 basis points as originally planned.
• The SG&A rate is expected to be up 25 basis points to 60 basis points compared to 60 basis points to 80 basis points as originally planned.

For the second quarter, the company expects same-store sales of negative 5% to negative 7% and EPS of 65 cents to 70 cents vs. consensus at 69 cents.

For Rothbort's preview heading into the Nordstrom conference call, please click here.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.

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