We expect Nordstrom to report a relatively in-line quarter compared with the Street consensus of $1.34 as well as implied guidance of $1.30-$1.35. Overall, we project 1% total sales growth, to $3.7 billion. We project gross margin, including the impact of Fashion Rewards, to decline 35 basis points, and SG&A deleverage of 40 basis points given the softer top line and continued investment. Nordstrom is scheduled to report fourth-quarter earnings after the markets close on Thursday, February 20.

We believe will be there will be conservative initial guidance from the company, given the challenges of the holiday season, a tougher start to the year for retail given underlying consumer concerns and continued weather challenges, and planned investment. We project gross margin to be up 5-10 basis points, including the impact of Fashion Rewards, and 8% SG&A growth, yielding 10 basis points of SG&A deleverage. While expectations are for initial guidance to be conservative, we see opportunity as we move through the year from the aggressive expansion of Nordstrom Rack (the off-price segment has also been faring better), strength in e-commerce, the company’s entrance into Canada in the second half, and easier comparisons.

Near term, we are concerned about the peak investment year, which could pressure operating margins against a tepid top-line environment. Long term, however, we continue to view Nordstrom as a best-in-class retailer and remain positive on the company’s growth initiatives with more than 50% of growth to come from Nordstrom Rack, e-commerce, and Canadian expansion. On a price-to-earnings basis, the stock trades at 15 times our revised fiscal 2014 estimate, versus department store peers at 11 times 2014 estimates and a 10-year historical multiple of 15 times. We believe the premium multiple is sustainable, based on Nordstrom’s best-in-class brand status and its superior metrics, including ROIC, sales per square foot, and operating margins compared with peers.