In the midst of luxury earnings season, we were not at all surprised to see Nordstrom (JWN) and Saks (SKS) post excellent results.
Nordstrom ended the quarter with revenues up 12.4% and consolidated same store sales up 7.3%. Breaking its downward trend, Nordstrom Rack posted a 4.8% comp, which we think is impressive given the current success of the full-price Nordstrom store. During 2009 and early 2010, Nordstrom Rack posted terrific growth as it served as the means to deleveraging the massive inventory build that took place in 2007 and 2008. However, the discounter struggled in the first half, likely due to less fashionable items hitting their shelves.
In spite of an excellent quarter, we think shares of Nordstrom are about fairly valued, and do not view it as a particularly attractive risk/reward situation at current levels.
Meanwhile, ultra high-end retailer Saks also posted a strong quarter in its weakest of the year. Same store sales were up a staggering 15.5% and losses narrowed to just $0.05, better than we had expected. Saks Direct, the online segment, posted a strong 50% growth rate, which we expect to be a huge driver of future growth.
Although the company was rather vague, and frankly, like most other retailers, fairly uncertain about the second half of the year, we were happy to see inventories up only single digits, pointing to higher future average selling prices and less mark-downs, which will ultimately help gross margins.
It’s no secret that private equity seems interested in the company, which might place a small speculative premium on the stock. However, even after a strong quarter, solid gross margins, and a low inventory build, we see no reason to change our fair value on Saks. Though the company is highly exposed to Wall Street spending, which has reportedly been a strong point this year, we think positive results will continue because Saks customers don’t feel the same squeeze that Kohl’s (KSS) or even Nordstrom might feel.