BAD HOLIDAY HAMMERS NORDSTROM
Byline: Thomas J. Ryan
NEW YORK — Nordstrom Inc. became the latest casualty of the weak holiday season, and the damage was severe.
The Seattle-based chain said the sales shortfall and markdown activity would result in earnings for the fourth quarter of between 18 and 23 cents a share, far below Wall Street’s consensus estimate of 38 cents. In the year-ago fourth quarter, it earned 50 cents a share.
“December performance was disappointing, and it represents a large portion of our business for the fourth quarter,” said Blake Nordstrom, president. “Our challenge is to compete successfully, regardless of the external environment, and to improve merchandise execution so we have what our customers are looking for.”
The forecast — Nordstrom’s second profit warning in four months — sent the company’s shares lower, down $1.50, or 7.4 percent, to $18.88 on Friday in over-the-counter trading. The stock’s 52-week trading range is $14.19 to $34.50. The drop in the stock wasn’t particularly conspicuous on a day when the Dow Jones Industrial Average tumbled 250 points, or 2.3 percent, to close at 10,662 and the Nasdaq plummeted 6.2 percent to end the day at 2,407.65.
December’s same-store sales declined 2.9 percent. Sales were down in all regions except the East Coast. Only women’s and children’s shoes, juniors and cosmetics posted comp gains. Comparable-store sales fell 3.1 percent at its full-line stores and 0.8 percent at its Rack off-price division, which also includes its Faconnable stores and one clearance chain.
On Friday, Nordstrom joined a deluge of retailers that one day earlier acknowledged that weak December sales would cause fourth-quarter profits to miss Wall Street estimates. The list included The Limited, which said it would miss Wall Street’s consensus estimates by 15 to 19 cents a share; Tiffany & Co., falling short by 9 cents; Abercrombie & Fitch, between 8 and 10 cents; Ann Taylor, 3 to 7 cents; Gap, by 3 to 5 cents, and TJX Cos., by 3 cents. Many analysts on Thursday also trimmed estimates on Target and Wal-Mart by a penny or two due to sales falling short.
The magnitude of Nordstrom’s shortfall from Wall Street’s targets — 15 to 20 cents — slightly surprised analysts, but didn’t shock them because of the tough Christmas selling climate and internal issues that have confronted Nordstrom since the fall, including new management.
“You look at the other softlines retailers,” said Michael Shea, at Davidson & Co. “They had a terrible December, and Nordstrom is no exception. Now layered on top of that are these internal issues, and you have an earnings miss.”
In September, the founding Nordstrom family resumed control of the chain with fourth-generation family heir Blake Nordstrom becoming president and his father Bruce Nordstrom coming out of retirement to return as chairman. The Nordstrom family owns 35 percent of the stock. John Whitacre, chairman and chief executive, as well as Michael Stein, vice president and chief financial officer, had resigned. A search for a new cfo is still under way.
Besides the tough selling climate, analysts believe the chain must have been impacted by the management turnover, which also included the resignation in September of Marty Wikstrom, formerly executive vice president of its full-line store group. Peter Nordstrom, Blake’s brother, took over that post. Also, some disturbances likely came from the firm’s ongoing efforts to overhaul its information systems.
“They were undertaking so many things from a large remerchandising effort, a massive systems transformation effort and a major change in management that, clearly, execution issues are being felt,” said Shari Schwartzman Eberts, at J.P. Morgan Securities.
Nordstrom’s guidance pulled down earnings estimates for the full year to between $1.01 and $1.06, which compares with $1.50 in 1999. Eberts said that though Nordstrom’s markdown activity is “severe,” it is unlikely to clear all excess inventory and, consequently, gross margin pressures should continue into the first quarter. As a result, she slashed her estimate for 2001 to $1.15 from $1.40.
Steve Kernkraut at Bear Stearns cut his 2001 estimate to $1.12 from $1.30.
“We believe that Nordstrom shares are vulnerable for a pullback nearer to their annual lows of $14 as there is little evidence yet of management’s turnaround of this franchise,” said Kernkraut.
Less aggressive was Jennifer Black at Wells Fargo Van Kasper, who trimmed her estimate for 2001 to $1.44 from $1.52. She also cut her rating on the stock to “buy” from “strong buy,” given the unlikelihood that Nordstrom will be releasing strong results for the next several months, but she remained fairly bullish.
“Nordstrom embodies a unique retail environment and a strong brand name that is now back in the hands of passionate leaders, and we recommend aggressively buying the stock should it drop into the midteens,” said Black in a research note.
The new management team appears to be slowing down the turnaround process after assessing that former management rushed many changes. In order to fix its flagging women’s business, which has been its weakest spot recently, the firm had hiked its mix of contemporary merchandise to between 30 and 40 percent from 10 percent. The move failed to stimulate sales. Nordstrom recently ditched a $40 million “Re-Invent Yourself” campaign — its first national ad launch — aimed at younger customers after it alienated core customers.
Last week, the company disclosed that it would close its Yakima, Wash., unit in March.
Nordstrom said at an analyst meeting earlier this month that it is now looking to tweak its women’s merchandise assortments, roll out new inventory technology and realign its various buying organizations by merchandise category. A $150 million to $200 million “perpetual inventory” systems overhaul should start getting phased in by February 2002 to help in such areas as assortment planning, markdown planning, replenishment and tracking merchandise through the pipeline. The company also is focusing more on expenses, cutting back the 35 different consulting companies it employed and reducing TV advertising.
Still, the majority of analysts are maintaining “hold” ratings on the stock and are taking a wait-and-see attitude on new management.
“I guess you have to give them a chance, but I would have liked to see some new blood,” said Davidson’s Shea. “That same group has been in there a long time.”