Nordstrom: Strength in Luxury

Luxuries haven't taken a hit because of high gas prices and a slowing economy, if upscale department-store chain Nordstrom's recent performance is any measure. And there's evidence the trend will continue.

Nordstrom (symbol JWN) reported a 20% jump in second-quarter earnings and an 8% rise in revenues, driven by sales of designer apparel, accessories and cosmetics. In a conference call on Friday, Pete Nordstrom, executive vice-president in charge of department stores, said that sales of regular-priced items were strong during the quarter -- proof that the price of luxury goods doesn't seem to be a barrier for Nordstrom's customers. He also reported that response to the chain's fall merchandise has been "favorable" so far.

The company's income rose to $179 million or 67 cents per share during the second quarter. That's up from $150 million or 53 cents per share a year ago. Nordstrom also raised its full-year 2006 earnings to a range of $2.31 per share to $2.39 per share, up from its previous forecasted range of $2.24 per share to $2.32 per share.

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Despite Nordstrom's rosy outlook, the company's stock has remained virtually flat since the earnings announcement, ending Friday at $36.68. That's because Nordstrom's results included a one-time, $5.6 million settlement from Visa/MasterCard. Excluding that gain, Nordstrom only beat Wall Street's forecasts by a penny.

Because Nordstrom has developed a reputation in recent quarters for beating guidance by a wider margin, some analysts said they expected more from the Seattle-based chain, which operates 156 stores in 27 states. Michelle Tan, an analyst with UBS Equity, summed up Nordstrom's performance as "a strong, though not-too-exciting second quarter." Tan currently rates the company a "buy," with a 12-month price target of $45. Nordstrom's shares currently trade at 15 times analysts' 2006 earnings estimates of $2.34 per share, according to Thomson First Call.

Citigroup analyst Deborah Weinswig maintained her "hold" rating on the company, but increased her 12-month target price from $39 to $41. Weinswig said the company's results reflect progress in its efforts to revamp merchandise and better manage inventory. She added that stronger sales in the women's division this quarter are proof that Nordstrom's improvement plan is "gaining traction."