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A Weaker First Quarter in Store at Nordstrom

Analysts have begun lowering earnings estimates as sales soften and the credit-card business flounders.

What should



soon-to-be-released fiscal first-quarter earnings have in common with the new string bikinis in stores for summer?

Both are looking a bit skimpy.

Although the

First Call

consensus estimate has remained at 24 cents a share for the quarter ended April 30, several analysts have quietly trimmed their expectations. Among them: Jennifer Black, of

Black & Co.

, who downgraded the stock to accumulate from strong buy on April 14. She predicts Nordstrom will earn 22 cents in the first quarter and cut her estimates for fiscal 2000 by 2 cents to $1.64 a share.

"We are taking a cautious view of the upcoming quarter, as we believe that some of the fundamentals have deteriorated," Black wrote in a memo to clients. Her firm hasn't done underwriting for Nordstrom.

Nordstrom, based in Seattle, declined to comment for this story. The company is scheduled to report earnings May 13.

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The stock is off nearly 13% since Black published her report, although some investors say it's still overvalued given the immediate risks. Tuesday, shares closed down 1 1/4, or 3.4%, to 35 7/16. That gives Nordstrom a price-to-earnings ratio of 26 based on trailing earnings, compared with an average of 21 for other department stores.

"I'm looking for a 30 price before I'm interested in buying the stock," says one investor who isn't involved in the stock but declined to be named. "Given that the trends are poor, the multiple is still high."

Long revered by investors and customers alike for its big-hearted service and pristine brand name, Nordstrom typically trades at a premium to its peers even though its profitability lags. But built into Nordstrom's hefty valuation is a bet that the current fiscal year will finally show a payoff on the company's efforts to boost margins by adding new computer systems and tighter controls.

J.P. Morgan

analyst Shari Schwartzman Eberts explains the situation this way: "The stock is pricing in a lot of the upside and none of the execution risk." Eberts rates the stock a market performer, and her firm hasn't performed underwriting services for Nordstrom.

The pitfalls are threefold: Soft sales, a slowing credit card business and a larger base of outstanding shares.

Sales at stores that have been open at least a year for the fiscal first quarter are running negative to the tune of 5%, says the investor. (Unlike most retailers, Nordstrom doesn't report monthly sales.) Black, the analyst, says the problem is most severe in women's fashions. With Nordstrom on a mission to trim inventory, buyers may have become too tentative in their merchandise selection, she says. The slump could last until fall. And if heavy promotions are needed to clear unsold goods, margins could suffer.

Then there's income that Nordstrom collects from its in-house credit card, which has been on the decline as customers pay off their balances faster and use other cards that offer more perks, says Eberts at J.P. Morgan.

Although many analysts expect this income to total $30 million for the first quarter, which would place it flat with the year-ago period, a more likely estimate is $26 million, the investor says. He predicts service charge income will decline 10% for the full fiscal year, which would translate into a 3-cent-per-share reduction in profits.

"In the grand scheme of things, it's not a huge deal," the person says. "But if they're stretching to make the numbers, it makes it more difficult to get there."

Finally, a Nordstrom stock repurchase plan appears to be getting off to a slower start than analysts and investors had expected, Eberts says. The result: more shares outstanding result in lower earnings per share.

Even the more bearish analysts characterize these problems as growing pains that should be fixed in the next two quarters. They expect Nordstrom to begin realizing some of the benefits of its new inventory management system by the second half of the year.

Nevertheless, it's worth remembering that while they're happening, growing pains can still hurt.