Here's why Nordstrom shares tumbled

Nordstrom reports disappointing earnings
Nordstrom reports disappointing earnings

Nordstrom shares tumbled Friday after the retailer reported a second-straight quarter of softness across its full-price, discount and online stores.

At one point, shares fell more than 10 percent, but they recovered some of the losses by late morning. (Click here for the latest price.)

Analysts considered the best-in-class department store a casualty of the overall sluggish retail environment, particularly as it pertained to discounting across the sector.

Even as the high-end store held the line on storewide promotions, its commitment to matching other stores' prices contributed to a 1.8 percent dent in its gross margin — a hit that was exacerbated by its need to mark down merchandise to clear inventory.

Paired with a conservative outlook for 2016, Nordstrom's second-straight quarter of disappointing results reignited investor concern that its exposure to the high-end consumer could translate into softness this year, particularly as the stock market continues to fluctuate.

But perhaps more importantly, its discount Rack stores — which have fueled much of the company's revenue growth over the past few years — posted their third same-store sales decline for the year.

Handbags and luggage are displayed for sale in a Nordstrom Inc. store.
Ben Nelms | Bloomberg | Getty Images

Despite this softness, several analysts reiterated their "buy" rating on the retailer. They argued that the dip in Nordstrom's stock price represents an "inexpensive entry point" given the company's unique merchandise, exposure to the off-price category, growth opportunities in markets such as Canada and New York, and its mature online operations.

"Despite the choppy near-term fundamentals, we still view Nordstrom as a high-quality, specialty department store growth story," Cowen analyst Oliver Chen said.

On a call with analysts on Thursday, Co-President Pete Nordstrom said the weeks-long promotional events held by its competitors are "what puts the pressure" on Nordstrom. The company expects these pressures to continue into the first half of 2016, with analysts raising an additional caution flag over its still-high inventory levels. Whereas overall sales grew 5.2 percent during the fourth quarter, inventories increased by 12 percent.

Nordstrom is taking several steps to improve its fundamentals. In an effort to increase sales and introduce a broader swath of shoppers to its brand, management reiterated its goal to operate roughly 300 Rack stores by 2020. That would represent growth of about 100 stores.

Though this business has noticeably slowed over the past year, Co-President Blake Nordstrom said these stores "come out of the gate" at a high productivity level.

Shoppers enter Nordstrom's at the Westfield Santa Anita Mall in Arcadia, California.
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In an effort to stem discounting in its full-price stores, Nordstrom is searching for unique product lines that aren't sold through its competitors and examining a potential build-out of its private label products. Both of these strategies could limit its exposure to price matching. More broadly speaking, the company is also slowing its capital investments by $300 million over the next five years, to $4 billion.

Still, several analysts remain cautious on the Nordstrom name, as its position as a best-in-class department store might not be enough to mitigate external pressures from a slowdown in consumer spending, particularly among these stores.

"We believe the department store sector as a whole remains challenged, ... particularly as inventory is high across the space going into 2016," Citi analyst Paul Lejuez said.