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Why Nordstrom Stock Popped Today

Motley Fool - Thu Jun 1, 1:00PM CDT

What happened

Shares of the department store chain Nordstrom (NYSE: JWN) jumped 3.3% through 1 p.m. ET on Thursday after beating analyst forecasts for first-quarter earnings last night.

Heading into the quarter, analysts were feeling pretty downbeat about Nordstrom, predicting the retail stock would lose $0.08 per share on sales of $3.12 billion. As it turned out, sales came in at a healthy $3.18 billion, and instead of losing money, Nordstrom earned a surprise profit of $0.07 per share! Or did it?

So what

But while sales beat expectations, they were still down more than 11% year over year. What's more, the $0.07 per share in profit that Nordstrom investors seem so happy about today was an adjusted number. When calculated according to generally accepted accounting principles (GAAP), Nordstrom actually reported a $1.27 loss per share.

Management says the only reason it lost money was because it had to take a charge for winding down its Canadian business. Still, that cost shareholders real losses in the first quarter.

Now what

On the plus side, with the first-quarter charge to earnings out of the way, Nordstrom is now in a position to start making real improvements in earnings.

Gross profit margins are looking up, rising 110 basis points in the quarter. Inventory levels are down nearly 8%, reducing pressure to put goods on sale to move product.

And management is forecasting a slower rate of sales declines over the balance of this year, with revenue projected to drop only 4% to 6%. GAAP profits should be achieved this year, in a range of $0.60 to $1 per share, and adjusted profits per share should range between $1.80 and $2.20 per share.

As the Canadian write-downs roll off the company's financial statements toward year-end, this implies that Nordstrom stock could be valued at anywhere from 7.2 to 8.8 times what it will be earning without those charges. With its generous 5% dividend yield, it shouldn't take much growth at all to turn this stock into a winner for investors.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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