Department Stores

Nordstrom isn't going private anytime soon, so it needs to focus on these 4 things

Key Points
  • The department store chain is holding a meeting with investors in Los Angeles this week.
  • Wall Street is looking for answers regarding Nordstrom's off-price business, its real estate strategy and online investments.
  • The Nordstrom family was hoping to take the retailer private, but couldn't agree with the board on a price.
  • For now, Nordstrom must compete under the same pressures as Macy's, J.C. Penney and others.
Shoppers enter the Nordstrom store April 1, 2003 on Michigan Avenue in Chicago.
Scott Olson | Getty Images

Nordstrom will meet with investors Tuesday in Los Angeles to share its vision for how it moves forward as a public company.

Earlier this year, the Nordstrom family fought to take the department store chain private, as it was looking to make critical investments outside of the public eye. The deal talks fell through, however, when a price couldn't be agreed upon.

For now, Nordstrom faces similar scrutiny as Macy's and J.C. Penney. The retailer's challenge is to make the investments needed to compete against Amazon, while continuing to keep shareholders happy — this is no easy task, as more shopping heads online and mall traffic dwindles.

The Seattle-based retailer has long been considered the best of its peer group — for touting a healthier, slimmer real estate footprint, inking deals with popular apparel brands like Topshop for stores within its stores, and running a lucrative off-price business, Nordstrom Rack.

But there are growing concerns that even best-in-class Nordstrom can't keep up. During the latest quarter, the company's online business blossomed, but same-store sales growth at both its full-line and off-price locations wasn't as strong as expected.

Nordstrom shares are up nearly 13 percent since the start of the year. Rivals like Macy's have seen larger gains in recent months. In the case of Macy's, its stock is up 31 percent year-to-date. This partly reflects how beaten down department store stocks were in 2017. But finding growth could also become a challenge for Nordstrom.

Earlier this month, Cowen & Co. lowered its rating on Nordstrom shares to market perform from outperform, and dropped its price target to $51 from $56. Nordstrom shares closed Monday at $53.52.

Cowen analyst Oliver Chen has warned that the retailer may need to close up to 10 percent of its physical stores. He's also concerned about the Rack division losing momentum and struggling to compete with the likes of TJ Maxx and Ross Stores.

Here are four areas investors are focused on, ahead of Tuesday's meeting:

Real estate strategy

With 122 full-line stores throughout the U.S. and Canada, and 239 Nordstrom Rack locations, Nordstrom has a much smaller footprint than most of its peers. Macy's, for example, has more than 800 stores, including its off-price Backstage division, Bluemercury and Bloomingdale's. Penny has more than 860 stores. Kohl's has more than 1,100.

Still, even Nordstrom likely will need to shutter some locations in the coming years. The company announced one closure — a rare move for the retailer — earlier this year, in Salem, Oregon. But it also opened up its first shop dedicated to men. Located in Manhattan, the men's store will sit next to the first full-line Nordstrom department store for women, which is set to open in the city in 2019.

A better strategy for Nordstrom moving forward could be to focus on its best-performing locations in key markets like New York, San Francisco, Chicago and Los Angeles. Shuttering less-profitable stores would allow the company to pour money into renovating older assets.

This would also give Nordstrom more resources to open additional Nordstrom Local stores. The company opened its first late last year on Melrose Avenue in Los Angles. On Monday, Nordstrom said it would add more Local locations in Los Angeles and expand to New York. These stores are smaller, focused on service and provide shoppers with a unique experience. This includes on-site tailoring, a nail salon and pick-up kiosks for online orders.

Other retailers including Kohl's and Target are experimenting with smaller-format stores more recently as well.

Sales at Nordstrom Rack

Nordstrom Rack has been a bright spot for the department store chain for years, consecutively growing sales as those at Nordstrom's full-line stores soften. From 2016 to 2017, for example, net sales at Nordstrom Rack climbed to $4.1 billion from $3.8 billion, while net sales at full-line locations fell to $6.95 billion from $7.2 billion.

In the first quarter of fiscal 2018, however, same-store sales at Nordstrom's off-price stores only grew 0.4 percent, compared with an increase of 2.3 percent a year prior. Management said on a conference call that sales on were still very strong, despite a slowdown at the stores, which according to the company was due to weakness in more "seasonal categories."

Nordstrom's competitors in the off-price category include Macy's Backstage, TJ Maxx, Ross Stores, Burlington, Saks Off Fifth and Neiman Marcus Last Call. Analysts worry that Nordstrom won't be able to compete with TJ Maxx and Ross in particular, which have seen stronger same-store sales growth of late and have many more locations.

This year, Nordstrom opened its first Rack store in Canada and is looking to open more than a dozen locations across the country, hopefully finding new pockets of growth where markets in the U.S. have stagnated.

The real test will come when Nordstrom reports its earnings and investors see whether Rack's slower first-quarter growth was a fluke, or if the business is really in trouble.

Tie-ups with Allbirds and others

Nordstrom has a knack for partnering with strong brands. A recent example stems from Silicon Valley cult brand Allbirds, which makes shoes from sustainable materials like merino wool and eucalyptus tree fiber. The e-commerce company has been opening pop-up shops within a handful of Nordstrom stores.

Nordstrom's new men's store in New York is also home to brands like Bonobos and Shinola, which were digital retailers before they broke into bricks and mortar.

If Nordstrom can become the go-to retail partner for these up-and-coming players, it could drive more traffic to stores because shoppers often can't find Allbirds sneakers, for example, elsewhere. These digitally native brands tout selling primarily directly to consumers, but Nordstrom has been able to entice some companies to move into its stores by giving theme prime shelf space, collaborative marketing campaigns and the chance to sell alongside more established players like Ralph Lauren and Coach.

Industry analysts expert Nordstrom to do more of this, especially as the company grows in New York, where many online-first retailers are based today. The strategy could help keep Nordstrom relevant and ahead of its peers. It can be a huge traffic driver and offers an element of exclusivity.

Online growth

In 2017, roughly one-quarter of Nordstrom's sales came from online. According to the company, that percentage should balloon to 50 within the next few years. But how will Nordstrom will get there?

Most retailers by now understand that making investments in e-commerce can weigh on a business' margins, at least in the near term. The cost of winning over a shopper online is much higher than it is at the store.

"The retail environment is changing faster than ever," Brian Gill, technology senior vice president at Nordstrom, said earlier this year. "We need to invest in technologies that will enable us to deliver on those qualities and better serve customers in a digitally-connected world."

Nordstrom in March announced its acquisition of two digital start-ups — BevyUp and MessageYes — to help bolster its online business. BevyUp encourages shoppers to share information with each other and browse items together online, while MessageYes offers brands the opportunity to text their customers, leveraging artificial intelligence and integrated payments.

Analysts expect department store chains will be proactive by either buying smaller businesses outright to improve their own, or investing in new start-ups to work closely with them. Nordstrom could benefit from making more strategic acquisitions or investments like this.

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