Nordstrom Inc. is often seen as the savviest of the department stores with its higher-end positioning, attention to service and willingness to test new high-tech shopping options.
But will it be enough?
Investors aren’t necessarily so sure.
Shares of Nordstrom fell as much as 5.1 percent Monday, closing down 2.1 percent to $50.70, after Cowen analyst Oliver Chen downgraded the stock to market perform from outperform, citing concerns about pressure at the Rack off-price unit, comp underperformance at the full-line stores and the need to control costs.
Chen said he continues to appreciate Nordstrom’s “best-in-class digital and omnichannel efforts, off-price strategy, foundational investments and focus on experiential.”
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But he said the stock is fairly valued and that investors are looking for 2018 to be a turning point, when margins stabilize around 6 percent before they start expanding.
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The stock is also trading at about what the Nordstrom family itself considers a fair value, given that it offered $50 a share for the company in March and then sweetened that price somewhat.
While the analyst acknowledged the company’s investor day on July 10 could boost the stock, he still raised several warning flags.
• Nordstrom Rack is a “work in progress as digital strength has masked weak physical store comps,” Chen said. While the off-price business accounts for 33 percent of Nordstrom’s sales, its 239 stores are most of that, amounting to 23 percent of the overall company’s top line. Rack’s comparable-sales growth slowed to a 0.4 percent gain in the first quarter, down from 2.3 percent growth a year earlier.
“While we acknowledge management considers physical and digital as one business unit and is channel agnostic, Rack stores comps have declined for the last six quarters and have underperformed both MarMaxx [a division of TJX Cos. Inc.] and Ross Stores comps over the last 13 consecutive quarters as self-inflicted missteps have led to Rack missing out on strong sector momentum,” Chen said.
• Full-line comp sales, compared with results from two years earlier, have declined for six consecutive quarters as digital strength has not offset brick-and-mortar weakness, the analyst said. (Year-over-year, Nordstrom’s full line comp sales rose 0.7 percent in the first quarter).
Chen said: “While not immediate, we believe Nordstrom has an opportunity to improve physical store traffic” by increasing reserve online, try-on in-store initiative, further linking mobile to the in-store experience and other steps.
• Nordstrom has been willing to spend to reinvent so far, but as a public company it also needs to consider the profit needs of Wall Street.
Chen said the company has to “bend the cost curve and begin improving [earnings before interest and taxes] margins by leveraging fixed costs, scaling generational investments and lowering the rate of investment spend growth on marketing and technology.”
Among the investments the company is working to get more value from is Trunk Club. Nordstrom acquired the personalized apparel service for $357 million in a 2014 stock deal, only to later write down $197 million of that.
But Trunk Club is finding its place and, after a test last year, is taking part in Nordstrom famed Anniversary Sale with expanded assortment at six of its Clubhouses. Only Trunk Club clients who are also Nordstrom cardholders will gain early access to the sale on July 10. The sale will open up to all Nordstrom cardholders on July 13 and prices will go back up on Aug. 5. The Anniversary Sale features a selection of new fall items at 30 percent off.
Shopping the sale at Trunk Club will be vastly different from that of a Nordstrom unit. At the Madison Avenue Clubhouse in Manhattan, clients chat with their stylist at the bar in the lounge over coffee or a cold drink. Then they go to one of 12 fitting spaces to try on the items that were pulled expressly for them by their stylist.
“Clients love the personal attention. It’s very high-touch and high-service. Stylists will curate the Anniversary Sale for customers. We’re by-appointment only,” said Lindsay Cooperman, head of styling at the Madison Avenue Clubhouse, noting that the location employs 50 stylists.
During the company’s first-quarter conference call, chief financial officer Anne Bramman said, “Trunk Club is showing signs of improvement.” And copresident Erik Nordstrom added, “The team spent all of last year doing a pretty deep dive,” and making some changes to the business. “We think we can scale it.”
