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Nordstrom: A Star With Tricky Guidance

The department store operator is expert at low-balling expectations, but eventually the Street catches on.
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is set to report fiscal fourth-quarter earnings after the close of trading today, and recent metrics indicate that the company's multiyear turnaround continues apace. The company is clearly the star of a rather lackluster department store industry, and JWN investors will be focusing on just how well it was able to leverage a rather strong sales performance in the quarter. Comments on current business trends and forward guidance will also be important.

This last item, guidance, is the tricky part. Management has low-balled analysts for several quarters now, trouncing estimates as the company's excellent merchandising and cost-control efforts have driven results far ahead of expectations. Nordstrom execs are the kings of under-promise and over-deliver, but unfortunately most analysts now have elevated expectations.

This creates a great deal of risk going into the earnings report, as the midpoint of management guidance will likely be below current analyst estimates. It would be nice to think that most investors realize that management has no vested interest in over-promising, but I fully expect a knee-jerk negative reaction in after-hours trading, should this scenario play out. The company's stiff comps in February, among other competitive challenges, will factor into guidance and investors' psyches.

Turning back to the fourth quarter, analysts are looking for Nordstrom to report earnings per share of 68 cents a share, well above official management guidance of 60 to 65 cents given back in November and 31% ahead of the same period a year ago. Fourth-quarter sales are already known, coming in at $2.3 billion, representing year-over-year growth of 9.3%.

Analyst estimates have risen steadily during the quarter, thanks mostly to Nordstrom posting same-store sales well ahead of plan. The company, like many others in the industry, got off to a slow start in November, but that month's comp of 2.8% was eclipsed by December's 7.7% showing and January's 6.0% tally. The latter result was particularly impressive, given the very challenging comps of January 2005.

Again, the main focus of the fourth quarter will be on margins. The company has spent a great deal of capital on information technology in recent years, and the results have been very positive. On the basis of recent management comments, it appears that inventories are in excellent shape, and some of the best-performing sales categories have been cosmetics and accessories, which carry high margins.

Investors will also look for clues about the company's expansion plans, especially the opportunity to purchase some of



unwanted stores. New-store openings have been somewhat limited in recent years (a good thing, if you ask me!) as the company focused on improving operations, but a large part of the Nordstrom growth story is the ability to expand its relatively small store footprint. The company is far from saturation, which has been the death knell of many retail growth stocks.

To reiterate, though, management guidance will likely be disappointing, and that's what Nordstrom longs have to contend with this afternoon.

At the time of publication, Bagley was long JWN.

Jeffrey Bagley, CFA, is Vice President, Equities and a portfolio manager at McCabe Capital Managers, Ltd. McCabe Capital, a registered investment advisor located in King of Prussia, Pa., has approximately $800 million in assets under management. Prior to joining McCabe Capital, Bagley was a sell-side analyst at Schroder & Co. and NatWest Markets. He was also a senior analyst and editor at the Value Line Investment Survey. Bagley received an MBA in finance from Fordham University and a BS in business economics from the State University of New York.

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