According to Zhitong Finance, Nordstrom (JWN.US) has released its financial performance for the second quarter. Q2 earnings exceeded Wall Street's expectations, indicating that the department store company has made significant progress in cost reduction and efficiency improvement. However, the company has raised its full-year revenue and profit guidance. Q2 revenue increased 3.2% year-on-year to $3.9 billion, in line with market expectations. After the performance announcement, the company's stock price rose after hours, up 8.09% to $22.85.

The company announced a net profit of $0.122 billion for the three months ended August 3, equivalent to $0.72 per share, compared to $0.137 billion, or $0.84 per share, for the same period last year. Excluding one-time items related to supply chain impairment, adjusted (non-GAAP) earnings per share were $0.96, compared to market expectations of $0.71.

In the second quarter, Nordstrom's profit decreased compared to the same period last year, but its profit increased in the past six months. Last year, Nordstrom had a net loss of $67 million in the six months ended July 29, 2023, but this year in the same period, it achieved a profit of $83 million.

Looking ahead, Nordstrom currently expects adjusted earnings per share for the full year to be between $1.75 and $2.05, compared to the previous guidance range of $1.65 to $2.05, with the midpoint exceeding market expectations of $1.76. The company expects sales for the year to decline by 1% to grow by 1%, compared to the previous guidance of a 2% decline to 1% growth. The company also expects comparable sales to be flat to up 2%; in contrast, previous guidance was for comparable sales to decline 1% to grow 2%.

Nordstrom CEO Erik Nordstrom said in a press release that despite the company's cautious guidance, the company remains optimistic about its performance in the second half of the year. Nordstrom said, "Our second-quarter performance was solid, and we are encouraged by the continued strength in revenue and profit, as well as the progress we have made in expanding gross margin and improving profitability. We are confident about the outlook for the rest of this year and look forward to maintaining the momentum we have already built."

Nordstrom's same-store sales in Q2 increased by 1.9%, while the total value of merchandise increased by 3.5%. It is not yet clear to what extent the growth in total merchandise transactions is related to price increases and volume.

Faced with ongoing inflation and high interest rates, American consumers continue to reduce discretionary spending, and retailers have been working hard to improve operations, reduce costs, and protect profits from the impact of weak demand. Nordstrom has stated that it is working to improve its supply chain. In the last quarter, the company reported that the online orders were delivered in the required time, with a decrease of 5% or more. It also improved the way goods are delivered to customers and stores, which the company says helps increase conversion rates and reduce return rates.

Another area the company is focusing on is developing its low-price brand, Nordstrom Rack. In the past few quarters, Nordstrom Rack has been growing and has helped support the company's overall performance. This quarter, Nordstrom Rack's sales increased by 8.8%, higher than expected, and comparable store sales grew by 4.1%. In contrast, Nordstrom's main business net sales and comparable store sales only increased by 0.9%.

Nordstrom has been actively building more Rack stores, and has opened 11 new stores so far in the current fiscal year, with a goal to open at least 22 by the end of the year. Nordstrom's focus on Rack is crucial for its ability to compete with low-price giant TJX Companies (TJX.US) – the owner of TJ Maxx and Marshall's, and has captured consumers – but they are eager for cheaper options and deals.

For over a year, the discount industry has experienced explosive growth, but Rack missed the start of this trend. In order to reverse the decline, the company has been focused on opening more stores, hiring low-price experts, and strengthening its focus on well-known brands.

Nordstrom's push into discount stores is in line with the trend of American consumer downgrades

Nordstrom's performance also reflects the recent signs of American consumer downgrades revealed in the financial reports of retailers. In recent weeks, the market has seen a wave of financial reports from US retail giants, including Walmart (WMT.US), Target (TGT.US), and Macy's (M.US) among others. The performance indicates that in the face of high inflation in the US economy, consumers are affected by tightened wallets and discounted commodity prices. The trend of consumers reducing non-essential spending and favoring low-price goods has a greater impact on high-end department stores, retailers of large non-essential items, compared to discount stores and retailers of essential consumer goods.

For example, the performance of the largest US retailer, Walmart, in the second quarter exceeded expectations and continued to raise its annual revenue and profit guidance, as its customers are attracted by lower prices and convenient delivery methods. During the inflation period, Walmart's performance has been overall better than other retailers, as it sells primarily groceries and has long been a price leader, deriving pricing power from its scale and passing this pricing power on to customers, suiting consumer preferences during inflation and high interest rates to save on cheap essential purchases.

While middle and low-income shoppers have always been Walmart's core customer base, Walmart has recently been attracting customers with annual incomes exceeding $100,000 and expanding its market share. Walmart stated that it continued to expand its market share among high-income households last quarter. With high-income consumers reducing their spending or looking for bargains, Walmart's decision to offer more discounts, new products, and remodel its stores is paying off.

Walmart's low-price strategy has paid off. Walmart CEO Doug McMillon stated that groceries account for more than half of its total sales, with prices approximately 25% lower than traditional supermarkets. The company has also temporarily reduced prices on 7,200 selected items, resulting in overall lower prices compared to the same period last year, not only in stores but also in Sam's Club.

Following the announcement of the performance, Target, Ross Stores (ROST.US), TJX Companies, and Peloton (PTON.US) continued to strengthen the trend of being seen as a "value-oriented" retailer.

Discount retailers, including Target, seem to be better positioned to benefit from price-sensitive consumers. Executives said that in May of this year, Target announced moderate price reductions on 5,000 food and household items, which fueled an increase in customer traffic. Target reported on Wednesday that its comparable sales increased by 2% in the three months ending August 3, exceeding expectations. Discretionary spending also increased, especially in the apparel business.

Target CEO Brian Cornell said in a conference call with analysts that consumers still have elasticity. He added that they "continue to focus on value" while trying to manage household budgets.

In addition, discount retailer TJX Companies also announced better-than-expected quarterly performance on Wednesday, with comparable sales increasing by 4%. The company raised its pre-tax profit margin expectations for this year. Ross Stores' second-quarter performance, benefiting from demand for its discounted clothing and lower shipping costs, also exceeded Wall Street's expectations, and the company raised its profit forecast for fiscal year 2024.

In contrast, Macy's, the largest chain department store in the U.S., reported a decline in same-store sales in the second quarter and expects full-year revenue and same-store sales to decline. This is mainly due to the company's positioning towards mid to high-end customers with less price elasticity. Even with forced price reductions and more promotions on mid-to-high-end products to compete with reasonably priced competitors, the retailer is still struggling in sales.

At the same time, the weak performance of home improvement retailers such as Home Depot (HD.US) and Lowe's Companies (LOW.US) also indicates a weak consumer market, further reflecting a reluctance to splurge on non-essential items.

As borrowing costs rise and inflation surges, consumers are postponing large projects such as flooring, kitchen cabinets, and bathrooms. Both Home Depot and Lowe's have reported a decline in Q2 same-store sales and their stock prices have fallen significantly. Analysts point out that this is because prices for large, non-essential items such as home improvement products are relatively high, causing consumers to delay their purchases.

Another example of reduced consumer spending in the US is the significant lag in Target's stock performance compared to Walmart. This is due to Target's exposure to non-essential items, while Walmart benefits from its extensive business in groceries and other essential goods.

Quincy Krosby, Chief Global Strategist at LPL Financial, said that the contrast between struggling department stores and thriving discount retailers highlights a consumer trend: even with cooling inflation, shoppers are becoming "increasingly cautious and selective".