The gruesome reality of today’s retail marketplace is that even very successful brands like Nordstrom (NYSE: JWN) face a brutal struggle for survival.
Nordstrom’s challenge is to keep its customers from going online. That will be tough because Nordstrom’s average shopper fits the profile that Amazon (NASDAQ: AMZN) and Walmart.com (NYSE: WMT) want most. That customer is upper-middle class, affluent, professional, pressed for time, and urban or suburban.
Walmart is targeting those customers with artificial intelligence concierges and same-day delivery services aimed at upper-class moms. Amazon is rolling out two-hour delivery through its Amazon Prime Now in Los Angeles. Walmart is upping the ante by buying up brands such as Bonobos that target a more affluent demographic.
Can Nordstrom Keep the Upper Middle Class?
Nordstrom’s greatest challenge is to keep the upper-middle class; especially the younger upper middle class, coming to its brick and mortar stores.
This is why Nordstrom is opening different kinds of stores, including an upscale 47,000 square foot men’s emporium in Manhattan, Fortune reported. The hope is to attract affluent male professionals that would never set foot inside a department store.
This is the second new concept from Nordstrom is less than a year. The company is testing Nordstrom Local on Melrose Place in Los Angeles. Local is a small store that features such amenities as stylists, nail stylists, a juice bar, a beer and wine bar, tailors, and pickup for merchandise ordered online. Nordstrom Local is all service with little or no merchandise.
The hope is to offer Nordstrom’s legendary customer service without a large inventory or massive footprint. Customers would make most of the purchases online then pick up merchandise at Local. Nordstrom Local offers amenities such as same-day delivery and easy returns for any online retailer.
The smart strategy here is to sell service, which Amazon cannot sell online, rather than merchandise. Expenses are reduced by trimming the size, cutting staff, and limiting inventory.
One advantage to Nordstrom Local is that it can easily be rolled out in growing urban areas like Los Angeles and Brooklyn. Another is that it can be easily integrated with other online retailers such as Amazon.
Is Nordstrom Making Money?
Nordstrom’s struggle is clear but is the chain making enough money to finance the major brand restructuring that will be needed for long-term survival.
The answer provided by the financials I found at Stockrow was maybe. Nordstrom reported an operating income of $351 million and a gross profit of $1.733 billion for 1st Quarter 2018. The company is making some money in the form of a $151 million net income but its margins are narrow.
This explains why Nordstrom is so anxious to open smaller stores with lower expenses. The company needs to reduce operating costs and generate more cash. Its revenues were good at $4.702 billion, and the $608 million free cash flow is high but the margin for error is limited, the company had an operating cash flow of $803 million on February 3, 2018.
Nor were resources that great Nordstrom reported cash and short-term investments of $1.81 billion and assets of $8.115 billion in February 2018. With those resources, Nordstrom faces a struggle paying off its liabilities which were $7.138 billion on 3 February 2018.
Nordstrom Needs to Diversify
These numbers tell us one thing, Nordstrom needs to diversify beyond department stores and fast. The company needs to move into areas with lower expenses with higher profits in order to survive.
Like Macy’s (NYSE: M), Nordstrom needs to consider reducing its footprint and store fleet. Potential savings might be found by closing Nordstrom Rack locations and shedding questionable department stores like the one at Norfolk’s McArthur Center. Sales at that store fell by 25% in 2017, The Virginian-Pilot reported.
Other moves might be trimming the size of department stores, converting department stores into Rack or Local locations, and adding Local or Rack outlets to department stores. Another smart move will be to invite more brands like Tesla Motors (NASDAQ: TSLA) to open showrooms inside Nordstrom department stores.
Brands to consider adding to Nordstrom stores would be Amazon, Whole Foods, Acura, Lexus, Jaguar, Land Rover, Cadillac, Apple, and Alpha Romero. Bringing in a high-end electronics or appliance retailer would make a lot of sense as well.
Nordstrom’s stock was overpriced at the $50.65 it was trading for on 30 April 2018, but there is a lot of value left in this brand. It is certainly worth a second look despite all the doubts about department stores’ future.