Updated from 5:14 p.m. EDT

Analysts questioned Nordstrom's ( JWN) accounting abilities on Monday after the company reported that miscalculations had led it to greatly underestimate its quarterly guidance earlier this month.

Nordstrom beat analysts' expectations by 6 cents a share on Monday, when it reported that it earned $27.2 million, or 20 cents a share, in its first quarter. Those expectations were set by Nordstrom earlier this month, when it warned that it wouldn't meet prior guidance and lowered its outlook to 12 cents to 15 cents a share for the quarter.

But the company's revised guidance included inaccurate projections of freight costs and sales results across its divisions, company officials admitted on Monday. Although companies are usually praised by analysts -- and rewarded by investors -- for beating guidance, the magnitude of the difference between the company's guidance and its results raised skeptical questions from analysts.

"How does this relate to other areas of this company?" asked analyst Teresa Donahue of Neuberger Berman during Nordstrom's conference call. "This is a huge difference."

Company officials insisted that the issue with the freight costs has been corrected. Meanwhile, the company is working with the heads of its European operations to improve their projections, officials said.

"The magnitude of this difference is not acceptable. This is clearly an issue that should have been identified and corrected earlier in the quarter," said Mike Koppel, Nordstrom's chief financial officer, on the call. But he added, "We are confident that this is a one-time event."

Nordstrom's earnings were up from a year ago, when it lost $24.6 million, or 18 cents a share, in its first quarter.

Overall, the company's sales grew 7.8% to $1.34 billion. However, on a same-store basis, which compares results at outlets open for more than one year, Nordstrom's sales fell 1.4%.

Excluding various charges, Nordstrom would have earned $30.4 million, or 22 cents a share, in the just-completed quarter. On this basis, analysts surveyed by Thomson First Call were expecting Nordstrom to earn 14 cents a share on $1.32 billion in sales.

Nordstrom originally forecast that it would earn 23 to 27 cents a share in the quarter, on flat sales. But the company later warned that it wouldn't make those targets, citing poor comparable-store sales. The company's revised projections called for earnings of between 12 cents and 15 cents a share.

Projecting that same-store sales growth will be flat in the current quarter and for the rest of the year, Nordstrom warned investors that it won't meet its previous guidance for full-year earnings. The company now forecasts that it will earn between $1.19 and $1.23 cents a share for the full year.

Before its first-quarter earnings warning, the company had projected that it would earn between $1.33 and $1.39 a share for the year. Analysts currently expect the company to earn $1.14 for the year, according to Thomson First Call.

Nordstrom expects to earn between 35 cents and 40 cents a share in the current quarter.


Nordstrom's earnings miscalculation was largely the result of gross profit margin coming in $11 million better than expected, said Koppel.

Much of that margin difference was the result of a miscalculation of the company's freight costs in the quarter, Koppel said. Freight costs came in $5 million lower than expected, adding 40 basis points to gross margin as a percent of sales, he said.

Higher than planned sales volume at the company's European operations accounted for another $2 million of the $11 million margin difference, Koppel said. Nordstrom officials are working with the heads of its Fa¿onnable chain to improve their forecasting, he said.

The rest of the margin difference was accounted for by better-than-planned sales at each of the company's retail divisions, including its namesake department stores and its Nordstrom Rack outlet stores, Koppel said.

But official's explanations didn't mollify all analysts. One said the miscalculation was tantamount to a restatement.

"We should not expect these types of things happening in subsequent quarters," said one analyst.

Nordstrom hopes there won't be any more earnings miscalculations in the future, but its wrong to characterize the error as a "restatement," Koppel said.

"This is not a restatement. This was a miss in our projections for the quarter," he said.

Nordstrom's report was further clouded by a change in how the company reports its earnings. In prior years, Nordstrom reported on a system in which each quarter ended at the end of a calendar month, regardless of the day of the week. So, its first quarter last year ended on April 30 and its second quarter ended on July 31.

But following the lead of other retailers, Nordstrom this year began reporting on a 4-5-4 week basis, in which each quarterly period begins on a set day of the week and each quarter is comprised of one five-week month that falls in between two four-week months. Many retailers adopt the 4-5-4 system to simplify annual sales comparisons.

But the change meant that Nordstrom had about 3 more days in its quarter this year compared with last year. If the company's quarters were compared on like 4-5-4, or 91-day, periods, its sales would have grown 3.5% to $1.33 billion.

While the company's gross margin came in better than expected, as a portion of sales, it was flat with last year at 33.9%. Higher-than-planned markdowns helped to hold down margin, Koppel said. Such markdowns were driven by excess inventory and price competition, Koppel said.

Meanwhile, Nordstrom's operating expenses edged up in the quarter as a portion of sales. Such expenses increased 70 basis points to 31.7% of sales. Koppel attributed the increase to planned spending increases for new stores and employee benefits. The increased spending outpaced the company's slower-than-expected sales growth, he said.

The company's second quarter earnings projections represent a potential decline from last year. Excluding charges, Nordstrom earned 39 cents a share in the second quarter last year.