Will Amazon and Walmart Kill Nordstrom?

Nordstrom (NYSE: JWN); one of the few success stories in department stores, might be doomed to extinction in the age of Amazon (NASDAQ: AMZN).

Even the Nordstrom family; which owns about 30% of the company’s stock, has become bearish on department stores. Family members; including CO-Presidents Blake, Peter and Erik Nordstrom, are searching for a private equity buyer for their stock, CNBC reported.

Naturally investors will wonder: what do the Nordstroms know that we do not? A better question to ask might be what do the Nordstroms see that we also know? This of course is obvious online retailers are systematically wiping out department stores’ business.

How Walmart and Amazon plan to Kill Department Stores

It is no coincidence that the Nordstroms announced their stock sales; during the same month that Walmart (NYSE: WMT) announced, it had bought Bonobos for $310 million. The plan; which Bonobos fans seriously dislike, is to combine that portal with Walmart.com.

Bonobos sells high-end men’s clothing of the kind normally found in department stores like Nordstrom. Its’ offerings include chino pants, suits, dress shirts and other stock preppie gear. Among other things Bonobos sells some items through boutiques in Nordstrom, which is apparently a part owner of the unicorn, The New York Times Deal Book reported.

A big reason why Walmart bought Bonobos is to counter Amazon which is building up an impressive portfolio of fashion brands. Amazon fashion include: Eva Moon, Lark & Ro, Mae, Paris Sunday, Buttoned Down, Amazon Essentials, Goodthreads, Scout & Ro, all of which are exclusive for Prime members. Amazon also owns Zappos one of the most popular fashion websites.

All of these brands compete directly with department stores and target department stores’ key demographic: upper-middle class shoppers. These are the people who have the money to drop $100 on a shirt or $300 on a dress. Lose them and department stores might as well lock the door and call the real estate agent.

My guess is the Nordstroms are afraid there’s a new generation of upscale shoppers out there that never go to department stores. Many of them are Millennials and Generation Xers that cannot be bothered to go to the mall. Instead they do all their shopping online.

Is Nordstrom Amazon Proof?

This brings us to the $1 billion question is Nordstrom Amazon proof?

It might be the department store’s website crashed during a preliminary event for its Anniversary Sale on July 13, The Associated Press reported. That proves Nordstrom has legions of loyal fans out there but does it has any value? Remember Sears also had legions of loyal fans and that did not save the company.

Ycharts data indicates that Nordstrom has some value including:

  • Growing revenues. The department store its revenue grow from $14.47 billion in April 2016 to $14.86 billion a year later. That certainly bucked the trend, during the same period Dillard’s (NYSE: DDS) revenues dropped from $6.680 billion to $6.331 billion and JC Penney’s (NYSE: JCP) from $12.58 billion to $12.44 billion.

  • A net income of $371 million on April 30, 3017. Not great certainly better than Dillard’s $158.09 million and JC Penney’s loss of -$111 million. That net income was down from $518 million in April 2016 which indicates Nordstrom might be using deep discounting to keep sales figures up.

 

  • A profit margin of 1.88%.

 

  • A negative free cash flow of -$64 million.

 

  • Assets of $7.771 billion.

 

  • Cash and short-term investments of $653 million.

  • $1.561 billion in cash from operations on April 30, 3017.

 

  • A market capitalization of $7.766 billion on July 19, 2017.

 

  • An enterprise value of $9.772 billion on July 19, 2017.

 

These numbers show us that Nordstrom is neither a value investment nor Amazon-proof because it operates at a very narrow margin. All Amazon or Walmart would have to do to seriously damage Nordstrom is take 3% to 5% of its customers away.

That’s probably what the Nordstroms see and why they are thinking about selling out. They understand that the business might no longer be sustainable.

The narrow operating margin indicates that a collapse or drop off business at Nordstrom might be sudden. The recent collapse at JC Penney is an example of that. Unlike Target (NYSE: TGT) Nordstrom cannot afford to lose 10% of its revenues.

This makes Nordstrom stock definitely overvalued at $46.78 a share the price on July 19, 2017. It also makes the dividend of 37¢ far less attractive. Although it might make Nordstrom, a good short term growth stock. Its investors were rewarded with a return on equity of 43.97% on April 30, 2017.

I would be very leery of Nordstrom because it is in a declining industry. Yes Nordstrom is a good company, but its business is threatened by changing shopping habits and demographics.

Nordstrom’s Baby Boomer Problem

A major threat in Nordstrom’s future is the aging of Baby Boomers. Boomers are now 52 to 70 years in age or older meaning they’re retiring or getting close to retirement.

Retired people obviously have less need for suits or nice polo shirts for work. They also tend to buy and shop less, and dress more casually. A related problem is that a lot of retirees have less money and those that do are afraid to spend because they are no longer working.

If that was not bad enough Boomers will start dying off in higher numbers as well. This means Nordstrom will have fewer of the older customers that do their shopping at stores around. The demographics are already looking bleak for Nordstrom, Millennials (persons aged 19 to 35) now outnumber Boomers, Pew Research reported. To make matters worse Generation X (those between 36 and 51), will outnumber Boomers in 2028 – just 11 years from now.

Are Department Stores Doomed?

This means Nordstrom is going to have to dramatically change its business model to survive. One suggestion would be to pump money into the online business; which might be what the family intends to do with the proceeds of stock sales. Another might be to sell out to an online retailer like Amazon, Alibaba Holdings (NYSE: BABA) or Walmart.

Nordstrom is no-longer Amazon proof which means the department store business might be doomed. The industry will have to pare back and revamp everything just to survive. That means department stores are not a value investment and will not be for a very long time.