Nordstrom's 1Q sales rose 14 pct but profit only 2.7 pct as it spent on promotions, shipping

NEW YORK, N.Y. – Upscale retailer Nordstrom Inc. said its first-quarter net income rose a slim 2.7 per cent as it spent more on free shipping and other initiatives that boosted sales but squeezed its profit margin.

The earnings fell short of Wall Street expectations, and the department store chain’s shares fell more than 5 per cent in after-hours trading Thursday evening following the report.

Sales have rebounded since late 2009 for Nordstrom and many other luxury retailers as well-heeled shoppers have gotten more comfortable with splurging again, despite the vagaries of the stock markets. But Nordstrom and others also face a new challenge in shoppers, armed with smart phones and tablets, who are rethinking customer service. That’s pushing the upscale merchant, long known for its service, to light new paths in the digital era.

“Selection, speed and convenience have always been important to our customers,” company President Blake Nordstrom told investors during a conference call following the earning release. “But they are becoming even more critical going forward. We’re moving more quickly. We’re accelerating our learning.”

Last September, Nordstrom started offering free shipping on all online purchases with no minimum dollar amount. Previously, customers had to spend at least $200 to qualify. Return shipping is free now too. The company also is giving sales associates devices that let them check out shoppers anywhere in the store. It’s providing free Wi-Fi access in all of its full-line department stores. And, early this year, it enhanced its loyalty program, Fashion Rewards, allowing customers to qualify for prizes with less spending.

These changes — particularly the free shipping — helped Nordstrom’s online sales rise 44.2 per cent, compared with a year ago, while revenue at Nordstrom stores open at least a year climbed 8.5 per cent. That comparison is key for retailers because it’s unaffected by sales at stores that recently opened or closed.

But the cost of the initiatives — especially the shipping and Fashion Rewards changes — depressed Nordstrom’s gross profit and caused most of the 0.31-percentage-point drop in its gross margin, the company said. The gross profit margin was 37.5 per cent for the most recent quarter.

The Seattle-based company report net income of $149 million, or 70 cents per share, for the three months that ended April 28. That compares with $145 million, or 65 cents per share, a year earlier.

Analysts were expecting higher earnings of 75 cents per share, according to FactSet.

Nordstrom’s net sales rose to $2.54 billion, just shy of analysts’ average forecast for $2.55 billion.

The company maintained its full-year forecast. It calls for earnings of $3.30 to $3.45 per share, while analysts on average were expecting $3.49 per share.

Nordstrom’s shares fell $2.83, or 5.3 per cent, to $50.70 after hours. They ended regular trading down 39 cents at $53.53.