JWN Is No Exception to the Retail Pain

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

Excluding a 6-cent tax benefit from a lower tax rate and a 3-cent sales return reserve, last night Nordstrom (JWN - commentary - Cramer's Take) reported third-quarter EPS of 30 cents vs. expectations for 31 cents, for a year-over-year decline of 50%, on $1.8 billion in revenue vs. expectations for $1.816 billion, for a year-over-year decline of 8%. Third-quarter comps fell 11%, while full-line store comps fell 15.6% in the quarter.

The gross margin fell 332 basis points, to 34.3%, while the operating margin fell 670 basis points, to 2.9%. Inventories were up 2.9%, although inventory per square foot was 3% year over year.

Management guided to fourth-quarter comps of 13% to 16%, with an EPS range of 35 cents to45 cents vs. a consensus EPS estimate coming into the call of 70 cents, so the guidance for the Christmas quarter is being reduced by 50% from current consensus.

The story isn't unusual in retail. The consumer and the economy have fallen far faster than retailers in general and Nordstrom in particular can adjust inventories, expenses and capex, and margins and earnings have paid a considerable price for negative expense leverage.

Nordstrom management took great pains on the call to talk about controlling SG&A, conserving cash flow, adjusting inventory and suspending share repurchases, and the company even reduced planned capex to $350 million in 2009 from the original $560 million. Three new stores will be open in calendar 2009 and one will be relocated.

As we discussed in our preview, Nordstrom is reducing new store openings to seven or eight in 2009 and 2010, from the originally planned 12 new stores to adjust to the current operating environment.

To conclude, the consumer pullback for retailers driven by sales per square foot has been horrific. The issue for Nordstrom is to maintain the brand and the positive sales experience during these times and control variables such as SG&A and inventories while allowing the consumer and the macro environment to recover. Nordstrom's brand and customer loyalty are critical during these unprecedented times as is the company's model of offering customers a value proposition in the higher end of mall retail.

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Know What You Own: Nordstrom operates in the apparel store industry, and some of the other stocks in its field include Gap (GPS - commentary - Cramer's Take), Ross Stores (ROST - commentary - Cramer's Take), Limited Brands (LTD - commentary - Cramer's Take), Urban Outfitters (URBN - commentary - Cramer's Take), Abercrombie & Fitch (ANF - commentary - Cramer's Take) and American Eagle Outfitters (AEO - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.