Nordstrom's Rack business experiences significant growth, leading to a 35% increase in stock price and strong guidance from the retailer.

• The holiday quarter saw Nordstrom achieve better-than-expected profits and sales, leading the retailer to provide an optimistic outlook for the upcoming year.
• Nordstrom Rack has been highlighted for improvements by the retailer, despite rumors of a potential spinoff.
• In contrast to analysts' expectations of 3.7% growth, Nordstrom anticipates a revenue increase of between 5% and 7% for fiscal 2022 compared to the previous year.

Despite ongoing supply chain concerns and rampant inflation, the retailer reported better-than-expected profits and sales for the holiday quarter on Tuesday, prompting an optimistic outlook for the coming year.

The stock price of Nordstrom increased by more than 35% in after-hours trading after the report was released. Nordstrom currently has 22% of its shares sold short.

Despite recent underperformance in its off-price business, Nordstrom Rack, the retailer highlighted improvements in the segment in a report.

In the fiscal fourth quarter, Nordstrom reported a 5% decrease in net sales at Rack compared to the same period two years ago, which was a sequential improvement from the previous quarter when the off-price segment experienced an 8% decline compared to 2019.

Although the segment underperforms Nordstrom's full-line business, its revenue stream has remained relatively stable since 2019.

Since the pandemic, Rack has faced challenges in obtaining merchandise due to its dependence on other apparel brands to sell at clearance. With limited clothing inventory, the company has struggled to keep shelves stocked. Rack faces competition from other off-price chains such as , , , and Backstage.

Nordstrom's CEO, Erik Nordstrom, stated that the department store chain is concentrating on three main objectives: enhancing the performance of Nordstrom Rack, boosting profitability, and streamlining supply chain and inventory management.

According to a survey of analysts by Refinitiv, how the retailer performed in its fourth quarter compared with Wall Street's expectations.

• Earnings per share: $1.23 vs. $1.02 expected
• Revenue: $4.49 billion vs. $4.35 billion expected

Nordstrom's net income for the three-month period ended Jan. 29 increased to $200 million, or $1.23 per share, from $33 million, or 21 cents a share, in the previous year. This exceeded the predicted per-share earnings of $1.02, as estimated by Refinitiv.

In 2020, total revenue, including credit card sales, reached $4.49 billion, surpassing estimates of $4.35 billion, while net sales, excluding credit card revenue, grew 23% year over year but decreased 1% compared to 2019 levels.

The home, active, designer, beauty, and kids categories were the strongest performers for the department store chain, as shoppers prioritized comfortable clothing and home decor items.

Despite the decline in urban locations, suburban stores continued to excel due to the absence of international tourists in the U.S.

Despite a 1% decline in digital sales compared to the same period in 2020, they still accounted for 44% of total revenue in the quarter and rose 23% on a two-year basis.

Forecasting growth

Nordstrom hopes, like other retailers, that consumers will return to offices, parties, concerts, and other social venues in the coming months. Its business will benefit as shoppers spend money on updating their wardrobes.

Nordstrom stated on Tuesday that consumers' resumption of travel after the emergence of the omicron variant has been encouraging so far.

In contrast to analysts' expectations of 3.7% growth, Nordstrom anticipates a revenue increase of 5% to 7% for fiscal 2022, including credit card sales.

The company's earnings, after excluding the effects of any share repurchase activity, are projected to be between $3.15 and $3.50 per share, which is significantly higher than the estimated earnings per share of $2.01.

Nordstrom's president and chief brand officer, Pete Nordstrom, stated that the company is concentrating on managing inventory levels in line with customer demand. Due to inaccurate forecasting and supply chain delays, the company has faced challenges in stocking seasonal products during the pandemic.

Nordstrom ended the fourth quarter with more inventory than planned, but anticipates reducing those levels relative to sales in the first quarter.

Brands can now advertise on the company's growing media advertising platform, which is also being utilized by retailers such as Macy's and others as a new revenue stream.

Pete Nordstrom informed analysts on an earnings conference call that he believes there is a significant chance to enhance both the customer experience and financial results.

Nordstrom shares had dropped approximately 14% year to date prior to Tuesday's extended trading surge.

Find the full financial press release from Nordstrom here.