Strong sales across all channels lifted Nordstrom Inc.’s net earnings 2.9 percent in the first quarter, though aggressive spending and hiring on e-commerce and technologies cut into the bottom line.

This story first appeared in the May 11, 2012 issue of WWD. Subscribe Today.

Profits in the quarter ended April 28 rose to $149 million, or 70 cents a diluted share, compared with $145 million, or 65 cents a share. Same-store sales increased 8.5 percent; total sales rose 13.7 percent to $2.53 billion.

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Sales online were the strongest, with Nordstrom reporting that its direct channel escalated 44.2 percent. It’s where Nordstrom is thinking big, including planning a 50 to 60 percent sales increase for its HauteLook site this year. The site is on plan and recently surpassed the eight-million-member mark. The direct business is “significantly outpacing the overall company performance and reflective of multiple initiatives under way in e-commerce,” the company said.

Nordstrom is also bullish on the $2 billion Rack outlet division, which is opening about 15 stores annually.

The $10.9 billion Seattle-based chain’s best-performing areas are women’s and men’s shoes, accessories and cosmetics.

Nordstrom officials said the first-quarter performance met its expectations, yet some analysts expressed concerns about the store’s women’s apparel business, which has been soft for several seasons, and that generous spending on technology and e-commerce, while fueling dramatic online increases, is cutting into profit margins. Last year, Nordstrom launched free shipping, which is another big expense. Earnings per share came in 5 cents below the 75 cents Wall Street analysts projected and Nordstrom’s stock fell 5.2 percent to $50.75 in after-hours trading Thursday.

Pete Nordstrom, president of merchandising, said in a conference call that some “pockets” in women’s are working better than others, citing the modern and casual sides and “good growth in active and lingerie,” which in many cases are getting more space on the selling floors. He also said by the next conference call that the company will have hired a new general merchandise manager in women’s to succeed Loretta Soffe, who left in January. “I am confident of that.” He’s been reviewing candidates from inside and outside the company.

One area of investment is with mobile point-of-sale devices, which are being tested and have 75 percent of the functionality of the regular POS. By the end of the year, some will have 100 percent, and a big rollout of the new technology is seen in the third quarter of next year. “We are really focused on serving customers on their terms,” said Jamie Nordstrom, president of direct, on the conference call. “We realize…how customers define service is changing, a lot of that is going online, it’s mobile, it’s speed and it’s convenience. We are making investments around those areas.”

Nordstrom’s gross profit, as a percent of sales, decreased 31 basis points compared with last year’s first quarter, mostly due to enhancements in the fashion rewards program and launching free shipping and free returns for online purchases. Retail selling, general and administrative expenses increased $110 million, or 18 percent, due to initiatives to improve the customer experience and grow e-commerce. The increase also reflected higher volume from existing and new stores.

“We were also surprised by the steep decline in EBIT margin for the quarter in light of much better-than-expected sales. We believe that the growth of e-commerce is pressuring margins as well as investments across the company in technology,” Deborah Weinswig, analyst at Citi Investment Research, wrote in a research note.

Going forward, Nordstrom expects a low-single-digit same-store sales gain in the second quarter, with a shift of the anniversary sale to one week later in July, moving it partly into the third quarter. However, there should be a high-single-digit increase in same-store sales in the third quarter.

Nordstrom reiterated that it expects gross profit, as a percent of sales, to decrease 5 to 35 basis points for the fiscal year, and retail SG&A expenses to increase $275 million to $340 million, including a $10 million boost from the initial forecast due to greater e-commerce initiatives. Same-store sales for the year are forecast at 4 to 6 percent ahead. Earnings per diluted share are seen at $3.30 to $3.45.

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