Byline: Jennifer Weitzman

NEW YORK — The struggle to move from its past to its future, compounded by lukewarm consumer interest, has Nordstrom singing the second-quarter blues.
Trying to reestablish itself and broaden its customer reach in the midst of a widespread apparel slump, the Seattle-based upscale retailer warned Friday that its second-quarter earnings are expected to fall 12 to 16 cents short of Wall Street’s 55-cents-a-share estimates.
Wall Street did not react kindly to the news as shares tumbled 4 1/16, or 18.3 percent, to close at 18 1/8, a new 52-week low, on the New York Stock Exchange.
Nordstrom, which has earned its reputation on top-notch customer service, blamed the shortfall on lower than anticipated sales, above-plan markdowns and promotional activity and increased selling and other expenses.
“Sales in our recent men’s and women’s half-yearly clearance events were not as strong as we had anticipated, and sales for the first week of our Anniversary Sales, while modestly better than last year, are below planned level,” John Whitacre, the company’s chairman and chief executive, said in a statement.
Whitacre said Nordstrom is not changing course based on clearance events in June or in one week of the anniversary event. “We will continue to refine our merchandise mix in the women’s area, and we must do a better job managing our expenses.”
The company is currently reassessing its outlook for the second half and said it is “guardedly optimistic.”
A spokeswoman said the company would not comment further until it released its earnings, slated for Aug. 16.
The company also said it will recognize an impairment charge estimated at 4 to 5 cents per share related to a 1998 $33 million investment in an Internet grocery business.
Sales results this quarter have been mixed. Same-store sales rose 9.1 percent in June, but that followed a dismal May, when comps slipped 11 percent.
The 72-unit chain has been fine-tuning merchandising, presentation and advertising all year in an effort to move its stores into the new century. To start, Nordstrom said it would reorganize its women’s apparel unit to attract a younger shopper. The retailer remodeled its women’s departments by bringing in a higher percentage of modern and casual goods, established boutique-like settings to help distinguish styles and price points, added new private labels and dropped others. And to make the stores more colorful, fun and easier to shop, management added new fixtures, displayed more coordinated outfits on mannequins, added art and repainted the walls. Also, the retailer has availed itself of new technology to improve delivery from vendors and speed turnover.
Although many analysts agree with Nordstrom’s decision to move to a more modern approach, they said its timing couldn’t be worse, as many retailers saw their sales slip during the quarter. They said almost all added that reinventing oneself is never easy, and looked at today’s announcement as a blip on the radar screen. Analysts also said that while the retail industry is in a slump, the timing of Nordstrom’s repositioning moves had proven problematic.
Steven Kernkraut, with Bear, Stearns, said he didn’t read too much into Friday’s news.
“They made a lot of changes to the merchandise mix, and when that happens, things don’t go like clockwork,” he said. “Women have expectations, and it will take a while for that to sink into their shopping psyches.”
Margaret Gilliam, of Gilliam & Co., said Nordstrom traveled a “thin line” when it changed its strategy to be more contemporary. She said it is difficult to determine just how far to go to get new customers without alienating existing ones.
“They were supposed to be a fashion store, but they weren’t for a long time. Now they are getting better,” Gilliam said.
She added that although they picked a tricky time to do it, Nordstrom is making good progress: “Their inventory was light going into the half-yearly sales in June, and they never had much in store between then and the anniversary sale.”
Jeffrey Edelman, a retail analyst with PaineWebber, said Nordstrom’s progress has been interrupted by a step or two backward. While its anniversary sale had been disappointing, Edelman said he is not sure if Nordstrom has fashion issues — did they go too far or not far enough? — with its new fall merchandise.
Further complicating analysts’ reading of Nordstrom’s situation is the timing of its fall releases. Because Nordstrom released its new fall fashions about a month ahead of other stores, analysts said it is difficult to determine if consumers just are not embracing Nordstrom’s forward-looking fashions or if in fact there is a general malaise in consumer spending that is causing the sales sluggishness.
Kernkraut said Nordstrom still has lots of room for improvement. He said, while “you can’t wave a magical wand” during transition, “clearly Nordstrom is hitting a speed bump here.”
He views the current troubles as a confluence of two phenomena: First, the traditional Nordstrom shopper may be surprised by the new merchandise, and secondly, the newly targeted customer may not be getting to the store.
“The merchandise offering was too conservative, and there was no newness,” Kernkraut said. “Now they are trying to bring the 20- to 35-year-old woman back into the mix.”
Wayne Hood, with Prudential Securities, said he reduced Nordstrom’s estimates to $1.45 from $1.67 for the full year and to $1.75 from $1.95 for the following year.
According to Hood, Nordstrom’s problems stem from not having leading-edge management information systems in place. This impaired management’s ability to react to a slowdown and left the stores with higher inventories.
For example, he said that last year Nordstrom had more inventory per square foot than other retailers in this sector, $57 versus an average of $43.
Other downgrades came from George K. Baum and Co., which cut Nordstrom to “neutral” from “strong buy.”
Despite Friday’s fallback, analysts agreed that Nordstrom would continue trying to be distinctive with a small selection of vendors and innovative private label lines. In addition, they encouraged the store to avoid the “me too” mentality embraced by other retailers with collections and brands that tend to duplicate each other. “Even though that has hurt them in the past,” Gilliam said, “in the long run, they stand for something, and they don’t look like another department store.”
Michael Exstein, with C.S. First Boston, said, “Clearly, the whole repositioning effort turned out to be more complicated and difficult to execute than management and Wall Street thought.”
But some point out that Nordstrom’s well-differentiated image continues to work in its favor. “They have wonderful competitive position,” Exstein said. “They stand for something more than price or two or three national brands.”
Exstein said he believes that Nordstrom’s singularity sometimes may work against it. Because the store and its contents are different, consumers may perceive that they are more expensive. To overcome that perception, Exstein said, the company launched a new advertising campaign, which started this spring and introduced a more interesting-looking store and arresting image.
But does this change in merchandise suggest that a change is in store for Nordstrom’s legendary customer service? Analysts said there is no need to do anything in that department. “They are just struggling right now,” Gilliam said. “So much stuff slid under the rug, like their computer systems not being up to speed. They weren’t on top of things.”

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