Story Stock: Nordstrom (JWN)

34.40 +3.28: Late Tuesday, Nordstrom reported sound results for the fiscal second quarter, sending shares up nearly 10% during the regular trading session. The Seattle-based luxury retailer posted earnings of $148.9 million, or $0.53 per share, compared to $106.9 million, or $0.37 per share, for the same quarter last year. Helped by better than expected comparable store sales and disciplined cost controls, earnings topped the consensus EPS estimate of $0.47. Management noted that the results "reflect ongoing merchandise execution, inventory productivity, and expense management improvements".

On the top-line, total sales for the quarter climbed 7.8% to $2.1 billion, from $2.0 billion a year earlier, on same store sales growth of 6.2%. Despite disappointing same store sales growth in July - traditionally a quiet month for retailers - quarterly comps were lifted by strong regular price sales and a favorable response to fall merchandise by customers. This is an encouraging sign heading into the peak of the back-to-school season.

As a result of continued sharp execution and inventory management, selling, general, and administrative expenses, as a percent of sales, declined by 1.2% during the quarter. Moreover, gross margin improved to 36.0% of sales, compared to 34.9% in the year ago period, further reflecting Nordstrom's strong sell through and lower markdown rates.

Given the stronger than expected results, Nordstrom lifted its full year profit outlook from $1.70-$1.75 per share to $1.80-$1.90 per share - above the consensus estimate of $1.77 per share. For the third quarter, the company expects earnings in the range of $0.30-$0.35 per share and between 3-5% same store sales growth. This compares to analysts' forecast of $0.32 per share.

While the weaker than expected July same store sales growth, which ended two years of positive results, prompted concerns over whether the disappointment would carry forward, Nordstrom's second quarter results underscores its strong appeal to high-end customers and continued strength in the luxury retail market. Despite record level gasoline prices, consumer spending has proven to be remarkably resilient, particularly among higher income consumers, and continues to support growth momentum.

Although JWN slipped over 20% from its all-time high of $37.96 in July following weaker than expected comps, it is still up over 50% in the past year. As consumer spending remains robust in the face of increasing gasoline-related pressures, Nordstrom is poised to continue its positive earnings momentum. The second quarter marks the eleventh consecutive period in which the company has topped expectations. Nevertheless, while the company remains well positioned against a favorable economic backdrop, investors should be watchful of the impact of rising oil prices and overall trends in the retail sector. At current price levels, Nordstrom is trading at 19.4x the FY05 EPS estimate of $1.77, compared to 24.0x for May Department Stores (MAY) and 15.4x for Federated Department Stores (FD).