Luxury retailer Nordstrom (click ticker for report: ) reported second quarter results Thursday afternoon. Sales grew 6% year-over-year to $2.9 billion driven by 4.9% same-store sales growth, which was about $100 million short of consensus expectations. However, the performance was negatively impacted by the shift of one week of the anniversary sale into the third quarter. Earnings fell 6% year-over-year to $0.75 per share, but came in a penny north of expectations–again, negatively impacted by the anniversary sale shift. However, the firm expects the shift to positively impact the third quarter, and increased its full-year earnings guidance to the range of $3.40 – $3.50 per share from its previously announced range of $3.30 – $3.45 per share. The company also increased its same-store sales expectations to 6%-7% from 4%-6%.
More interestingly, Nordstrom announced its plan to increase its investment in Nordstrom Rack, which grew sales 19% during the quarter on 7.7% same-store sales growth. The firm will open 15 this year, followed by 24 in 2013, and expects to have 230 Rack stores by the end of 2016, more than double its current 110 store footprint. We’re not shocked given the incredible success of marked-down stores like Ross (click ticker for report: ) and TJ Maxx (click ticker for report: ). Nordstrom doesn’t simply take its own items and push them through Rack, but it also buys wholesale inventories from other retailers—thereby, not necessarily cannibalizing its own brand name. Nordstrom also has the location for its first full-line store in New York City, which will open in 2018.
We thought results were very solid, especially since the firm expects lower SG&A during the third and fourth quarter that will more than offset an expected decline in gross margins. A focus on operational efficiency will be crucial for the firm’s huge Rack expansion efforts, which we think will be a positive catalyst for the company. Consumers are migrating toward brand names, and Rack will provide a counter-cyclical cushion for the retailer. Even though sales at its full-line stores weren’t impressive, even modest growth is acceptable given the tremendous same-store sales gains the firm has seen over the past two years. Still, Nordstrom only scores a 3 on the Valuentum Buying Index (our stock-selection methodology), and we think shares are fairly valued.