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Will Higher Expenses Mar Nordstrom's (JWN) Q3 Earnings?

Nordstrom, Inc. JWN is slated to release third-quarter fiscal 2017 results on Nov 9, after the closing bell. The question lingering in investors’ minds is, whether this leading fashion specialty retailer will be able to maintain its positive earnings surprise streak in the soon-to-be reported quarter.

The company’s earnings have outpaced the Zacks Consensus Estimate for the five consecutive quarters now. It has also pulled off an average positive earnings surprise of 36.7% in the trailing four quarters.

Let’s see how things are shaping up prior to the earnings announcement.

Which Way are Estimates Treading?

In order to get a clear picture of what analysts are thinking about the company right before earnings release, let’s have a look at the earnings estimate revisions. The Zacks Consensus Estimate for the fiscal third quarter has been stable at 63 cents in the past 30 days but reflects nearly 25% decline from 84 cents earned in the year-ago quarter.

Further, analysts polled by Zacks expect revenues of $3.6 billion, up 1.7% from the prior-year quarter. The consensus mark for revenues at Nordstrom full-line stores and Nordstrom Rack are currently pegged at $1,495 million and $997 million, respectively. These estimates show a year-over-year decline of 4.7% for Nordstrom full-line stores but 4.1% increase for Nordstrom Rack.

Factors at Play

Nordstrom’s shares have lost 18.9% in the last three months, wider than the industry’s decline of 3.8%. The downturn was owing to the temporary call off of the Nordstrom family's plans to take the company private.

Though Nordstrom’s growth strategy bodes well, investments related to occupancy, technology, supply chain and marketing are expected to increase near-term cost and weigh upon margins. Evidently, the company’s merchandise performance was hurt by higher occupancy expenses related to new Rack and Canada stores in the previous quarter. Also, for fiscal 2017, management anticipates Retail gross profit to be impacted by higher new store occupancy expenses and mix impact from off-price growth.

Further, the company’s projections for SG&A expenses incorporates higher technology and supply chain expenses related to its growth initiatives, offset by progress in productivity improvements.

While Nordstrom’s business is in line with the evolving retail industry that focuses on offering maximum choices to customers to enhance their shopping experience, the company cannot be fully immune to the ill-effects of the industry. However, sales growth at Nordstrom Racks and solid e-commerce performance remains encouraging. Also, the company’s cost saving initiatives, store expansion efforts and progress on 2020 strategy remains on track and is likely to drive growth.

What the Zacks Model Unveils?

Our proven model does not show that Nordstrom is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Nordstrom has an Earnings ESP of 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 63 cents. Moreover, the company carries a Zacks Rank #4 (Sell). This combination makes our surprise prediction difficult.

As it is we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks With Favorable Combination

Here are some other companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:

Zumiez Inc. ZUMZ has an Earnings ESP of +0.69% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Home Depot, Inc. HD has an Earnings ESP of +0.76% and a Zacks Rank #2.

Abercrombie & Fitch Co. ANF has an Earnings ESP of +6.38% and a Zacks Rank #3.

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