Nordstrom needs to 'generate top-line growth': Analyst

Nordstrom (JWN) reported mixed third-quarter results after the market close on Tuesday. The retailer posted adjusted earnings of $0.25 per share compared to estimates of $0.12, but net sales of $3.20 billion fell short of the expected $3.36 billion.

Morningstar Analyst David Swartz doesn't mince words, saying sales are "weak" and that a "sales decline of 7% is pretty bad." Swartz adds that the margins "are not bad," which he thinks indicates that the retailer may not be discounting as much. "Realistically, Nordstrom needs to generate top-line growth. It can't consistently report these negative sales growth numbers as we've seen the last few quarters," Swartz tells Yahoo Finance Live.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

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- Nordstrom out with mixed third quarter earnings. Adjusted earnings of $0.25 topping estimates. Net sales of $3.2 billion were down year over year and missed expectations. The retailer also narrowing its full year earnings guidance. But it actually raised it overall.

Joining us now, Morningstar Equity Analyst David Swartz to talk about the numbers. And, David, it does strike me here that we seem to see margin and profitability improvement, even if sales are not doing so great. So which are we waiting more heavily here?

DAVID SWARTZ: Clearly, Nordstrom sales are quite weak. Sales decline of 7% is pretty bad and especially compared to my estimate, which is down 3%. So Nordstrom sales were pretty weak even compared to pretty low expectations.

Now, the margins, as you referenced, are not bad. The margins are holding up a little bit, which suggests that Nordstrom is not discounting quite as much and that Nordstrom has sacrificed some sales for margin. But realistically, Nordstrom needs to generate top-line growth. They can't consistently report these negative sales growth numbers as we've seen in the last few quarters.

- So, David, if that's the-- you know, if that's the goal here, get top line working again, are there levers they can pull, David, to make that work in the quarters ahead?

DAVID SWARTZ: Nordstrom is doing a number of things. They're doing a lot of changes-- merchandising, opening a lot of rack stores to try to generate growth at rack. They've had some changes with the online business. They've cut back on some of the kind of expensive online sales to try to make these online sales more profitable.

I don't know if that's really generating top-line growth at the moment. It seems based on this report and also last quarter that rack is performing a little bit better than it had been the last couple of years. But now that the main Nordstrom stores seem to have dropped off, that could be because luxury sales in general have been declining. It could also be that Nordstrom is just making a lot of mistakes in terms of fashion. And it's not stocking the right merchandise.

- And, David, there's been some changes in the C-suite there as well. So they've got the new Chief Merchandising Officer Jamie Nordstrom appointed in September. What did you make of that appointment, David? And what do you think his top priority should be?

DAVID SWARTZ: Yeah, you know, Nordstrom's had a lot of problems the last few years. There's no doubt about it. And there have been a lot of changes. They've brought in other executives too, some who have backgrounds in more of the discount apparel space at retailers like TJX.

And, you know, I think they're trying to figure out a model that really works for both rack and for the Nordstrom stores. They have made a lot of big moves, for example, pulling out of Canada at the beginning of the year. Then they've really now kind of doubled down on rack. They're opening a lot of rack stores and planning to open many more, you know?

So I think that they are looking for a model that works. They're trying to really capitalize on Nordstrom's strengths, which are in its high fashion and sort of its luxury labels and also fashionable labels that aren't necessarily luxury and also in beauty, where Nordstrom is quite strong, and then at rack.

I think that Nordstrom is realizes that it can't be a discount store like the other discount stores. It needs to be more competitive by offering brands that people cannot find at other discount type stores. And so I think Nordstrom is making a lot of changes there to try to make sure that they have the merchandise in the stores that people really want and at the right prices. Because Nordstrom has been struggling with that the last couple of years.