By  on November 21, 2006

If you are in the upscale fashion business watch out: Nordstrom Inc. is coming at you.

Merchandise upgrades and a push into the designer market at the Seattle-based chain are paying off. Margins are rising, and there's heady expansion in the works.

On the strength of regular-price selling and higher ticket prices, particularly in apparel, Nordstrom reported a 26.3 percent rise in net earnings to $135.7 million, or 52 cents per diluted share, for the third quarter ended Oct. 28. That compares with net profits of $107.5 million, or 39 cents per diluted share, in the corresponding period a year earlier.

Total sales for the quarter rose 12.4 percent to $1.9 billion, compared with $1.7 billion in the year-ago period, and comp-store sales rose 10.7 percent.

"Regular-priced selling across our women's department has really changed for the better," Pete Nordstrom, president of merchandising, said during a conference call. "This category has been the toughest one for us to improve."

The company said all major merchandise categories performed above the low-single- digit growth plan, and that results in intimate apparel, accessories, women's better and designer apparel exceeded the company's overall percent gain.

The Nordstrom Direct operation, including its Web site and catalogue, and the Rack chain achieved double-digit same-store growth. Gross profit as a percent of sales increased 156 basis points versus the prior year. Selling, general and administrative expenses as a percentage of sales decreased 17 basis points versus the prior year, and would have decreased further were it not for $6.5 million in compensation costs linked to the price of the company's stock, which appreciated 38.4 percent in the quarter.

Moreover, Nordstrom has been sailing along, year-to-date. Net earnings increased 23.5 percent to $445.7 million for the nine-month period, while sales increased 9.3 percent to $5.9 billion, and 7.2 percent on a comp basis.

On the expansion front, Nordstrom unveiled a flurry of openings well out in the future, at malls owned by General Growth Properties: in spring 2009, at Fashion Place in Murray, Utah.; in fall 2009, at the Kenwood Towne Centre in Cincinnati; in spring 2010, at the Galleria in St. Louis, and in spring 2011, at Christiana Mall in Wilmington, Del. Last month, Nordstrom opened a new store in the Westfield Topanga Mall in Canoga Park, Calif., a 213,000-square-foot unit with the company's "most comprehensive designer offering in the country, along with new design concepts, amenities and services," the retailer said.In addition, Nordstrom has its eye on Manhattan where it wants to open a flagship. But real estate and construction costs are prohibitive and there are limited sites with sufficient space for Nordstrom to make a full presentation, making the search challenging.

The Seattle-based retailer plans five new stores in 2007 and seven for 2008, as well as six or seven remodels a year. By 2011, there will be a very small percentage of Nordstrom stores over 12 years old that are not either new or remodeled. Nordstrom's capital expenditures budget calls for $300 million to be spent this year, and $550 million next year, and another $2.25 billion from 2008 to 2011, with 80 percent earmarked for new stores, remodels and relocations.

Square footage will grow 4 to 5 percent, compounded annually, through 2011.

Based on recent strong performances, the company boosted its earnings outlook for the fiscal year ending Feb. 3 to diluted earnings per share in the range of $2.46 to $2.51, up from $2.31 to $2.39. The estimate includes a projected expense of 6 cents a diluted share for stock option compensation. For the fourth quarter, the company sees EPS in the range of 79 cents to 84 cents. Under the four-five-four retail calendar, the 2006 fourth quarter and fiscal year include an additional week, Nordstrom said. A midsingle-digit same-store sales increase for the year, and a low-single-digit gain for the fourth quarter are projected. Nordstrom's performance could be further lifted by a new merchandising planning system that goes live this quarter with all categories for spring 2007 merchandise planning and assorting by door.

The current fourth-quarter and full-year EPS consensus forecasts are 82 cents and $2.47, respectively.

The chain operates 99 full-line stores, 50 Nordstrom Racks, five Façonnable boutiques, one freestanding shoe store and two clearance stores. Nordstrom also operates 35 Façonnable boutiques in Europe, and catalogue.

Pete Nordstrom credited Loretta Soffe, executive vice president and general merchandise manager for all women's, excluding designer, with leading the efforts.

The designer business, he added, is the category achieving the largest percentage growth over plan compared with other offerings. "We are excited about the future of our designer plans," he said. "Our customer has an appetite for this product."About a quarter of Nordstrom full-line stores have been identified for merchandising with "a complete offering of designer," Nordstrom said, or one store in each major market where the retailer operates. "We have made a lot of progress. We have a long way to go." Designer is "a low-single-digit percent of Nordstrom's business currently. "We've got goals to where we want to go….It's hard for us to quantify what's possible there."

Across Nordstrom, "regular-priced selling and flow of new merchandise seems to be driving the business over anything else," Nordstrom added.

"We do strategy work with every merchandising category. Given the size of women's — roughly a third of our business — there is quite a bit of room for upside."

Beyond women's, Nordstrom said he sees the most opportunities to mine in cosmetics, then shoes. But he stressed," We don't see any end in our ability to execute better in all the categories where we currently do business."

Last quarter, he said the company saw much growth in accessories, particularly sunglasses, watches and handbags. He sees accessories continuing to drive the business in the fourth quarter, when jewelry "really takes on a lot of importance," along with cold-weather wear as it relates to luxury fabrications, cashmere specifically. "We are selling a lot of Ugg boots again, and handbags continue to be great."

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