Luxury department store chain Nordstrom (NYSE:JWN) fell short of analysts' expectations in Q3 FY2023, with revenue down 6.4% year on year to $3.32 billion. Turning to EPS, Nordstrom made a GAAP profit of $0.41 per share, improving from its loss of $0.13 per share in the same quarter last year.

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"In the third quarter we continued to make progress against our priorities, and we're especially pleased with the resulting improvements in gross margin and earnings," said Erik Nordstrom, chief executive officer of Nordstrom.

Known for its exceptional customer service that features a ‘no questions asked’ return policy, Nordstrom (NYSE:JWN) is a high-end department store chain.

Department Store

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Sales Growth

Nordstrom is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's revenue has declined over the last four years, dropping 1.5% annually as it failed to grow its store footprint meaningfully.

This quarter, Nordstrom reported a rather uninspiring 6.4% year-on-year revenue decline, missing Wall Street's expectations. Looking ahead, analysts expect sales to grow 2.3% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Nordstrom keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, Nordstrom operated 360 total retail locations, in line with its store count a year ago.

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Key Takeaways from Nordstrom's Q3 Results

With a market capitalization of $2.45 billion, Nordstrom is among smaller companies, but its $375 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly Nordstrom blew past analysts' operating income and EPS expectations this quarter. We were also excited its gross margin outperformed Wall Street's estimates. On the other hand, its revenue missed analysts' expectations as its gross merchandise volume ("GMV") fell by 7.1%. Despite the top-line miss, we think this was a great quarter as the company meaningfully surprised investors with its operating profitability. The stock is flat after reporting and currently trades at $15 per share.

Nordstrom may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.