Nordstrom Inc. (JWN - Analyst Report) posted yet another quarter of better-than-expected results yesterday. Both top and bottom lines of the upscale department store operator improved year over year in the third quarter of fiscal 2014. We believe the company’s customer strategy proved effective leading to growth across channels along with efficient inventory and expense management.

The company’s third-quarter earnings of 73 cents per share came ahead of the Zacks Consensus Estimate of 71 cents and in line with company’s expectations. Earnings also rose 5.8% from the comparable prior-year quarter.

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Total Revenue

Nordstrom’s total revenue of $3,140 million registered about 8.9% year-over-year growth and surpassed the Zacks Consensus Estimate of $3,108 million. The increase was primarily led by new store openings and Trunk Club acquisition, which was completed in August, as well as robust comparable-store sales (comps) growth.

The company’s Net Retail sales increased approximately 8.9% to $3,040 million while its Credit Card revenues grew 7.5% to $100 million.

Net sales at the company’s full-line stores increased 0.5% driven by the opening of 3 new full-line stores during the quarter, while sales for Rack stores were up 15% owing to robust volume growth at existing stores and the opening of 27 stores so far in 2014. Coming to the company’s online business, Direct net sales for the quarter surged 22% and Nordstromrack.com/HauteLook net sales rose 34%, both driven by enhanced merchandise offerings.

Total comps improved 3.9% in the quarter consistent with trends witnessed throughout the year. The company registered a 3.4% rise at Nordstrom comps (which consists full-line stores and Direct businesses), while comps at Nordstrom Rack reflected a downtrend year-to-date with a 1.7% increase. The company’s comps at full-line stores remained flat compared with last year, which indicated an improvement from year-to-date trends.

Q3 Operational Update

Gross profit of Nordstrom’s retail segment improved 7.9% year over year to $1,179 million. However, due to accelerated expansion of Rack stores and higher competitive markdowns, Nordstrom's gross profit margin in the retail segment contracted 33 basis points (bps) to 35.5%.

Total selling, general and administrative (SG&A) expenses increased 9.2% to $917 million in the quarter. Moreover, as a percentage of sales, SG&A expenses increased 7 bps primarily due to elevated expenses related to the Trunk Club acquisition, offset by diminished variable and bad debts.

Nordstrom's operating income decreased nearly 3.6% to $262 million from $253 million in the prior-year period. Moreover, operating margin contracted 50 bps to 8.6% primarily due to lower gross margin.

Balance Sheet and Cash Flow

Nordstrom ended the quarter with cash and cash equivalents of $433 million, lower than the prior-year figure of $947 million. Long-term debt net of current liabilities was $3,119 million versus $2,711 million in the prior-year period. During the first three quarters of 2014, Nordstrom generated $516 million in cash from operations.

Capital expenditures as of Nov 1, 2014, were $616 million. During the third quarter, the company bought back nearly 3.3 million shares for about $228 million. In September, the company expanded its share repurchase program with an additional $1 billion authorization. Currently, Nordstrom has about $1.1 billion remaining under its share repurchase authorization.

Store Update

During the third quarter, the company opened 3 full-line stores and 16 new Rack stores, expanding the total company store count to 293 from 257 at the end of third-quarter fiscal 2013. The company opened its first Canadian full-line store in the quarter.

Guidance

Following the third-quarter results, Nordstrom updated its fiscal 2014 guidance. The company lowered its expected earnings range to $3.70—$3.75 per share, against $3.80–$3.90 expected earlier. The lowered earnings forecast include the Trunk Club acquisition which will likely reduce fiscal 2014 earnings per share by 3%, compared with the initial guidance of 3%–5%. The company now assumes shares outstanding of nearly 194 million versus 192 million expected earlier.

Nordstrom now expects total sales to increase by nearly 7.5% against previous forecast of 6.5%–7.5%. Comps are projected to rise about 3.5%, which is at the mid-point of the previously expected range of 3%–4%. Credit Card revenues for the year are expected to be approximately $15 million, compared with $10 million projected earlier.

However, gross margin is now expected to contract in the range of 50–55 bps against 40–50 bps expected earlier. Moreover, management projects SG&A expenses, as a percentage of sales, to rise 40–45 bps compared with the previous guidance of 10–20 bps. Further, the company still expects interest expenses to decline $25 million in fiscal 2014. The tax rate is expected at about 39%.

Other Stocks to Consider

Nordstrom currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the apparel and shoe space include bebe stores inc. (BEBE - Snapshot Report), L Brands Inc. (LB - Analyst Report) and Zumiez Inc. (ZUMZ - Analyst Report), all carrying a Zacks Rank #2 (Buy).