Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Is Coronavirus Killing Nordstrom?

Nordstrom’s (NYSE: JWN) run of beating the odds in the department store business is over.

Nordstrom plans to close 16 full-scale department stores to save money and survive the pandemic, KOMO reports. Hence, the number of full-line Nordstrom (NYSE: JWN) department stores will fall from 117 to 101.

Reopening the rest of Nordstrom’s stores will require expensive coronavirus safety measures, Yahoo! Finance reports. Those measures include facemasks, social distancing, more cleaning, remodeled finishing rooms, altered hours of operation, curbside service, and tighter controls on returns and fitting rooms.

Importantly, one reason Nordstrom is closing the 16 stores is to get $150 million to pay for the precautions coronavirus necessitates, Yahoo! claims.

Is Nordstrom Dying from Coronavirus?

Before coronavirus, Nordstrom Inc. (NYSE: JWN) was one of two department-store success stories. The other success story was the bottom-feeding discounter the TJX Companies (NYSE: TJX).

Both Nordstrom and TJX (NYSE: TJX) succeeded by cashing in on income inequality. To explain, Nordstrom markets to the growing upper classes, while TJX sells to the cash-strapped working class.

The cash-in on income inequality business model was an excellent one because the wealth gulf is exploding in America. For example, the incomes of the top 1% of Americans grew five times as fast as those of the bottom 90% between 1979 and 2015, the Economic Policy Institute (EPI) claims.

Nordstrom made more money in recent decades because only wages for the employees at the top of the income spectrum, EPI claims. Meanwhile, EPI claims earnings for the top 0.1% of Americans grew 15 times faster than the bottom 90% between 1979 and 2017.

Plus, wages for top earners grew four times faster than the median American wage between 1979 and 2018, EPI estimates. Thus Nordstrom’s probable customers have more cash to spend on expensive clothes, perfume, and jewelry.

Can Coronavirus Make Nordstrom Stronger?

Strangely, coronavirus could make Nordstrom stronger and more profitable. To clarify, Nordstrom can close large, old, expensive, and money losing traditional department stores.

In particular, Nordstrom can get out of dying malls such as Westfield Annapolis and Colorado’s Flatirons. Notably, the 84,000 Flatirons store is 20 years old. In addition, Flatirons is outside of Boulder, an affluent city where most people shop on Amazon (NASDAQ: AMZN).

Closing dinosaurs such as the Flatirons and Paseo Neuvo stores could give Nordstrom money to invest in its smaller Nordstrom Local and Nordstrom Rack concepts. Nordstrom Local is a small neighbor store where shoppers can pick up online orders. Nordstrom plans to open local stores in affluent urban areas such as West Hollywood and New York City.

The Coronavirus Opportunity at Nordstrom

Nordstrom Rack is a popular discount outlet similar to TJX’s brands. Nordstrom Rack profits from income inequality by selling luxury goods to broke but ambitious people at low prices.

Coronavirus could give Nordstrom the opportunity to close dozens of large department stores and transition to a discounter and online retailer. There will be many empty stores for Rack and Local to occupy because retailers such as J. Crew and True Religion go bankrupt.

The COVID-19 pandemic also gives Nordstrom the opportunity to get out of the malls and into cheaper or fashionable locations. For instance, Nordstrom Local can open in hip, urban neighborhoods, or downtimes. Meanwhile, Rack can move into empty strip mall stores.

However, Nordstrom faces the danger of many of its customers shopping on Amazon instead of at department stores. In particular, older customers afraid of coronavirus are now shopping online. Department stores depend on such older customers who need to isolate.

Is Nordstrom Making Money?

Nordstrom (NYSE: JWN) was making money before coronavirus came to North America.

In detail, Nordstrom made a $1.653 billion gross profit on revenues of $4.537 billion in the quarter ending on 31 January 2020. In addition, Nordstrom reported a $298 million operating income and a $192 million common income on the same day.

Moreover, Nordstrom reported a $667 million operating cash flow and a $366 million operating cash flow for the last quarter. Thus, Nordstrom’s business can generate some cash.

Debt and Opportunity at Nordstrom

Conversely, Nordstrom had $853 million in cash and short-term investments on 31 January 2020. Therefore, Nordstrom keeps little of the cash it makes.

Coronavirus could help correct this problem by enabling Nordstrom to close enormous department stores. As a result, Nordstrom could reduce labor and real estate costs by eliminating the need for large staffs and enormous stores.

Nordstrom needs to reduce costs because it had $4.551 billion in long-term debt and $3.52 billion in current liabilities on 31 January 2020. To explain, Nordstrom could have trouble paying its debts because the stores are closed.

What Value Does Nordstrom Have?

Nordstrom had some value and a low margin of safety before coronavirus. Stockrow estimates Nordstrom’s revenues grew at a rate of 1.118% in the last quarter.

However, four quarters of shrinking revenue growth preceded that quarter. In detail, Nordstrom reported negative quarterly revenue growth rates of -2.03% on 31 October 2019, -4.79% on 31 July 2019, -3.31% on 30 April 2019, and -4.64% on 31 January 2019.

In addition, the willingness to close 40 unprofitable stores shows Nordstrom has leadership capable of making the tough decisions necessary for survival. Unfortunately, there is no indication Nordstrom has the resources those leaders will need to survive coronavirus.

Nordstrom’s Low Margin of Safety

Therefore, I conclude Nordstrom’s growth capacity and its margin of safety are low. I believe that Nordstrom more prone to collapse than most people assume.

As a result, the 37₵ quarterly dividend Nordstrom paid on 9 March 2020 could disappear. Under those circumstances, I believe Nordstrom is no longer a value investment.

Overall, Nordstrom shares offered an 8.64% dividend yield, an annualized payout of $1.48, and a payout ratio of 659.53% on 12 May 2020. Hence, many investors will consider Nordstrom an excellent dividend stock.

Why Nordstrom could Collapse

My advice; however, is to stay away from Nordstrom (NYSE: JWN) stock because it could collapse. In fact, I predict Nordstrom’s stock could soon drop below the $16.16 Mr. Market paid for it on 12 May 2020.

Nordstrom’s luck be could run out. I think investors need to avoid Nordstrom until this retailer proves it can recover from coronavirus.