NORDSTROM REVISES ESTIMATES BUT WALL STREET IS UNFAZED
Byline: Vicki M. Young / Evan Clark
NEW YORK — Wall Street mostly shrugged its shoulders about the downward revision of Nordstrom Inc.’s earnings expectations due to recent management changes and increased markdown activity among mall anchor chains.
The Seattle, Wash.-based retailer said Wednesday that it won’t meet the Street’s third-quarter expectations because of a series of non-recurring charges and lower-than-expected operating results. Nordstrom said it will take a total of between $41 million and $43 million in pretax charges, causing the retailer to either break even or post a loss for its upcoming third quarter, which ends on Oct. 31. The company said it will report results after the market closes on Nov. 15.
In its preview of third-quarter results, the company said it expects earnings to finish 23 cents to 27 cents below analysts’ expectations, numbers that straddle the First Call/Thomson Financial consensus estimate of 25 cents. In the comparable 1999 third quarter, the retailer earned $45.4 million, or 35 cents a share, on sales of $1.45 billion.
Shares of Nordstrom on Wednesday closed at $14.63, down $1.06 or 6.8 percent, in trading on the New York Stock Exchange. The close was near its 52-week low of $14 and less than half its high of $34.50.
In a research note issued Wednesday, Jennifer Black of First Security Van Kasper wrote, “On a historical basis, Nordstrom has not traded at its current price since 1993.” The company’s initial public offering was in 1990.
The third-quarter charges are expected to exact a 19- to 20-cent toll on earnings. They include an $18 million to $20 million writedown for its investment in Internet grocer Streamline.com Inc., a $13 million charge for severance costs relating to management restructuring and a $10 million write-off for obsolete software.
The balance of the 4-cent to 7-cent-per-share cut is from poor operating results stemming from leftover summer inventory, from which the retailer has had lower-than-expected sales which necessitated higher-than-expected markdowns, according to a company spokeswoman. She declined to elaborate further on the company’s restructuring efforts. As reported, between major management changes, the acquisition of Faconnable S.A. and the opening of a new 271,000 square-foot, four-story store on downtown Chicago’s Michigan Avenue last month, Nordstrom has had significant change in the last few months.
In Black’s research note, she wrote that there have been some positive effects stemming from the decision in August to bring the Nordstrom family back into the management fold.
“Many stores have been repainted in more subdued colors, and the product mix and advertising strategy are being put under a microscope,” she commented. “Employees tell us that they are having an easier time finding classic merchandise for their older customers, and they are pleased with the first signs of holiday merchandise.”
Black added that management is also making efforts to reeducate its employees, with an emphasis on customer service, and that employee morale is much higher than it has been in recent months.
Blake Nordstrom, president of the company, said in a statement, “Given recent changes in management, we are currently undertaking a thorough review of our business, listening to feedback from our customers and employees, and focusing on strong execution during the upcoming holiday season.” He emphasized that most of the factors reducing third-quarter results are “not related to day-to-day operations.”
As reported, the Nordstrom family at the end of August took back the reins of management at the company that bears its name. Blake Nordstrom was named president and Bruce Nordstrom returned to the position of chairman. Jack Whitacre departed as chairman and chief executive and the company elected to operate without a ceo for the time being. It is also searching for a chief financial officer to replace Michael Stein, a Whitacre recruit who resigned from his posts of executive vice president and cfo when Whitacre left the company.
Laura Richardson, an analyst with Pacific Crest Securities, told WWD that “management changes mean more uncertainty” and investors are still waiting for the new management to prove itself. She noted that we are now “watching the execution unfold” and seeing how the new management operates.
The reshuffling followed clumsy attempts to move beyond the company’s traditional image with more contemporary merchandise and marketing designed to attract younger shoppers. Under the former management team, the company launched its “Reinvent Yourself” national advertising campaign, but failed to see immediate benefits.
The company’s renowned customer service continues to be a strong point in most of its stores but hasn’t compensated for the retailer’s merchandising difficulties, according to some analysts. The company’s new merchandising brought its mix of contemporary merchandise up to between 30 and 40 percent from 10 percent.
Richardson said that the fashion merchandising has been “too young for the baby boom generation — too tight, too clingy.” She noted that this shift could have helped cause fit problems the company was having earlier this year.
As reported, Nordstrom late last month said it signed a definitive agreement to buy a 100 percent ownership of Faconnable, a classic, upper-priced men’s and women’s apparel collection, for $88 million in cash and about 5 million shares of Nordstrom common stock. Joseph Grillo of Deutsche Banc Alex. Brown described Wednesday’s announcement as “really a carryover result from the weak sales from the spring and summer time-frame. It’s not a new phenomenon. A number of mall-based chains have complained of weak sales. Some weren’t as disciplined about taking markdowns in clearing away goods. “Nordstrom is now making the decision to get the product moved out. May Department Stores took it in September and is now well-positioned for holiday. Federated Department Stores had probably the best performance in terms of planning their goods and taking the appropriate markdowns.”
Carl E. Steidtmann, director and chief economist at PricewaterhouseCoopers, observed, “Nordstrom’s announcement is a harbinger of things to come. Higher gasoline prices cut into discretionary spending in other areas. Higher interest rates cut off some home mortgage refinancing. The stock market has gone sideways and is now going down. That cuts into the sense of wealth that consumers have and impacts on their willingness to spend.”
Harry Ikenson, an analyst at Chase H&Q, said he wasn’t surprised by Nordstrom’s announcement. “Historically, anytime a company has a disappointing anniversary in July it has led to a disappointing second half. Between the management changes at various levels, the process of repositioning the merchandise, the updating of its technological systems, it’s not going as smoothly as we would like.”
Ikenson has cut estimates on an operating basis, moving third-quarter estimates down 7 cents to 17 cents and, based on expectations of heavy promotional activity, down 3 cents to 46 cents for the fourth. The revised estimate for the year is $1.28, down 10 cents. Fiscal 2001 operating earnings are pegged at $1.48.
Michael Exstein, an analyst at C.S. First Boston, observed, “Nordstrom is just the latest mall anchor to admit to a shortfall in the third quarter, joining May Department Stores, Saks, Kmart, Dillard’s and Target. Clearly, some of this is the first sign of an adjustment in strategy after the family took control of the company.”
The analyst has rated the stock a “weak hold.” He said, “I don’t know what is going to happen next. Frankly, at this stage of the game, whatever happens will be [from decisions made] under the old management team. You won’t see any significant impact from new management on the content side of the story till the first or second quarter.”
Walter Loeb of Loeb Associates added, “They’ve got to get the core business moving, but are having problems getting the momentum going. Nordstrom’s is on track for a turnaround. I believe that the company needs time for the reorganization to take hold. I am concerned about the near-term momentum of the company, but the turnaround is happening and in the long term the company will survive.”
Nordstrom currently operates 116 locations in 23 states.