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Investors aren't buying into Nordstrom's plan to become the "best fashion retailer in a digital world" over the next five years.
The Seattle-based company laid out an ambitious new digital strategy in a press release ahead of a meeting with analysts in Los Angeles on Tuesday, projecting earnings before interest and taxes to grow 5 to 6 percent on an average annualized basis from 2017 to 2022. It also estimated that annualized sales would rise between 3 and 4 percent over that time, outpacing the average annual growth projections for the apparel and footwear market of 1 percent.
Shares slid as much as 6 percent in intraday trading on the news. They recovered a little in the afternoon but were still down by about 3.9 percent to $51.46 a share at 2:45 p.m.
Nordstrom, like its rivals, is fighting for growth as it faces new competition from trendy e-commerce brands, slowing foot traffic at malls and Amazon's rising clout as an apparel retailer. Those efforts include digital investments, partnerships with upstart brands like Silicon Valley cult brand and opening a men's flagship in New York City.
Still, sales at its off-price Nordstrom Rack division — once a point of growth for the retailer — have weakened. And its investments in electronic commerce are eating into profit margins.
"We remain impressed by Nordstrom's openness to reinventing itself — fortuitous investments in e-comm and Rack have given the retailer a fairly unique level of stability," said KeyBanc analyst Ed Yruma. "However, initiatives like pop-ups, product exclusives and remodels have been unable to counter the natural traffic migration to ecomm at the full-line stores."
Key Banc downgraded shares of Nordstrom to sector weight from overweight before the company released its financial targets Tuesday.
Nordstrom is meeting with investors following the family's failed attempt to take the department store chain private earlier this year, after it was unable to get the financing needed to secure a deal at an acceptable price.
The company's agenda in Los Angeles on Tuesday included discussions about its plans to expand to new markets, like Canada with Nordstrom Rack, and to open additional Nordstrom Local stores, which were announced Monday. The smaller-format stores are focused on offering services, like manicures and pedicures, instead of sending shoppers home with their hands full of bags. Nordstrom is planning to open more Local stores in Los Angeles and New York.
"This positions this year as an inflection point for long-term growth," CFO Anne Bramman told investors at the meeting. "2018 is a turning point [for us]."
Last year, Nordstrom's net sales rose 4.4 percent, better than an increase of 2.9 percent in fiscal 2016. But growth has clearly tapered from earlier years, like when net sales skyrocketed 7.8 percent higher in fiscal 2014.
For 2018, Nordstrom has reaffirmed its prior financial outlook. Net sales are expected to fall within a range of $15.2 billion to $15.4 billion, while same-store sales are forecast to rise as much as 1.5 percent overall. Earnings per share are expected to fall within a range of $3.35 to $3.55, excluding the impact of any future share repurchases.
Nordstrom reported net sales of $15.1 billion in fiscal 2017 and projected a 2 percent increase to $15.4 billion for this year. Analysts surveyed by Thomson Reuters were expecting revenue to top $16 billion, while earnings per share were forecast by the Street to fall within a range of $3.37 and $3.61 in fiscal 2018.
Looking to fiscal 2019, analysts surveyed by Thomson Reuters had projected revenue to fall within a range of $15.87 billion and $16.57 billion. Nordstrom said it expects to grow sales to roughly $18 billion by 2022.
According to Bramman, Nordstrom's digital sales penetration should be about 40 percent by 2022, compared with 26 percent in 2017. It's increasingly shifting its focus to NordstromRack.com, for example. The company is expecting to have about 4.4 percent market share within five years, compared with 3.9 percent in 2017.
"There's nothing we see that doesn't give us confidence … [that] as some of these investments mature we can build upon that and grow our market share," co-president Erik Nordstrom said.
Laying out its five-year plan, Nordstrom also said Tuesday it expects free cash flow will increase from $600 million in 2017 to roughly $800 million by 2020 and $1 billion by 2022 as its investments mature. That includes investments in HauteLook, Trunk Club and expanding in Canada. Adjusted return on invested capital is forecast to grow from 9.7 percent last year to a mid-teens range within the next half decade.
Prior to the meeting, Nordstrom shares had climbed roughly 13 percent over the past year and the company's market value stood at roughly $9 billion. That compares with Macy's, which has a market value of $11.2 billion, and J.C. Penney, which is valued at $754.3 million.
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