Market Mad House

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

Long Ideas

Is Nordstrom making money?

I ask is Nordstrom making money because many of its competitors are collapsing. In particular, JC Penney (NYSE: JCP) had a $1.30 share price on 6 May 2019.

However, Nordstrom (NYSE: JWN) is surviving with a gross profit of $1.639 billion, revenues of $4.483 billion, and an operating income of $333 million on 2 February 2019. In addition Nordstrom had a stock price of $40.47 on 2 May 2019.

Unfortunately, surviving is all that Nordstrom is doing. In fact, there is one very worrisome sign at Nordstrom a negative revenue growth rate of -4.5% on 2 February 2019.

Are Nordstrom’s revenues growing?

However, Nordstrom’s revenue grew from $1.313 billion in November 2018 to $1.639 billion in February 2019. Conversely, Nordstrom’s post-holiday revenues on 3 February 2018 ($1.733 billion) were higher than the last quarter 2018 revenues.

Essentially, Nordstrom made less money during the 2018 holidays than it did during the 2017 holidays, despite reports of economic growth. In addition, Nordstrom’s recent including New York stores, and local stores in Los Angeles is doing little to grow its revenues.

Nor are Nordstrom’s most recent quarterly cash flows of $654 million operating and $429 million in free cash flow that great. Consequently, low revenue growth limits Nordstrom’s ability to generate cash.

Nordstrom is Generating less Cash

Moreover, Nordstrom’s cash flow is down significantly from 2018. For instance, Nordstrom recorded an operating cash of $803 million on 3 February 2018. In addition, Nordstrom had a free cash flow of $608 million on the same day.

Thus, Nordstrom is generating less cash from growing revenues. Not surprisingly, Nordstrom’s cash and equivalents fell from $1.181 billion in February 2018 to $957 million in February 2019.

Yet, strangely Nordstrom’s cost of revenues is actually down. To explain, Nordstrom reported a $2.969 billion cost of revenue on February 3, 2018, and a $2.844 billion cost of revenue a year later.

Nordstrom is Becoming Less Competitive

Consequently, I think Nordstrom is slowly becoming less competitive. That is dangerous because two dangerous direct retailers, Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN) are making blatant grabs for Nordstrom’s customers.

To explain, both Amazon and Walmart are increasing their capabilities in urban markets like New York to snare Nordstrom’s affluent customers. In fact, two cities; New York and Los Angeles, could account for 25% of Nordstrom’s full-price merchandise sales soon, The New York Times estimates.

This situation is dangerous because it forces Nordstrom to compete aggressively for a few concentrated markets. Moreover, the entry bar for competitors is low so many companies enter the market.

Consequently, Nordstrom is opening neighborhood stores hubs in Manhattan and LA to serve the affluent in their natural environment, The Times reports. To explain, each Hub is a smaller Local store with fitting rooms, tailoring, a service counter for returns, and amenities like a salon, coffee shop, and bar.

A Nordstrom Local is a 2,000 to 2,400 store with amenities designed for the neighborhood, Business Insider reports. For example, a Nordstrom local near the courthouse could offer tailoring of suits for lawyers.

Walmart is Coming for Nordstrom’s customers

Nordstrom may never get that market share because Walmart is making a big push in New York.

To explain, Walmart’s incubator Store No 8 is testing Jetblack; an algorithm that shops for customers in Manhattan, Vox reports. Couriers deliver all Jetblack orders within two days and pick up returns for free.

In addition, to the experiments Store No. 8 conducts in New York, Walmart owns the men’s fashion brand Bonobos and partners with Lord & Taylor. Consequently, a smart move for Nordstrom is to launch a concierge or join Jetblack.

Obviously, Nordstrom local will be a perfect support mechanism for a concierge service like Jetblack. For instance, Jetblack couriers could take clothes to Nordstrom Local for tailoring.

Nordstrom’s Customer Base is Growing but is the market shrinking?

Walmart is going after Nordstrom’s customers because the upper class is growing while the middle class shrinks.

To explain, Pew Research estimates the percentage of upper-class American household grew from 17% in 1991 to 19% in 2016. Meanwhile, the percentage of middle-class households in America fell from 56% in 1991 to 52% in 2016.

Moreover, the upper class has more money. Pew calculates incomes for upper-income households grew by 9% between 2000 and 2016. Rising from $172,152 to $187,872 a year.

Plus, Pew estimates the wealth of the average upper-income family in America grew from $659,300 in 2013 to $810,000 in 2016. Consequently, Nordstrom has more customers and more competition for those customers. For instance, Neiman Marcus opened its first New York Store at Manhattan’s Hudson Yards in March, Forbes reports.

I think American retail is cannibalizing itself with more retailers fighting over fewer customers. In addition, more retailers are adding amenities and retail theater services to attract the wealthy. For instance, Neiman Marcus’s Hudson Yards store offers shoe shine, a cobbler, and a custom hat shop.

Nordstrom’s vulnerable position

Under these circumstances, Nordstrom is in a very vulnerable position. In particular, Nordstrom is straight in Amazon’s cross hairs.

Tellingly, Amazon (NASDAQ: AMZN), now offers channels for Luxury Brands, Luxury Beauty, and Women’s Luxury Brands. However, Forbes reports Amazon is struggling to attract luxury brands to its platform.

Therefore, Nordstrom is more Amazon proof than traditional department stores. To explain, Amazon cannot offer the level of customer service and quality and authenticity guarantees upper-class customers want.

Amazon’s Fashion push threatens Nordstrom 

However, Amazon is in a position to still upper-class customers that do not care about brands. For instance, an Amazon acquisition called Body Labs is trying to develop a system for remotely measuring customers’ body sizes.  

Hence, that could enable Amazon to make and ship custom tailored clothes, TechCrunch reports. In addition, robots could sew those clothes to reduce costs. Importantly, Amazon has patented an automated sewing system based on florescent inks, GeekWire reports.

Moreover, Amazon competes aggressively with smaller luxury products like perfumes, makeup, toiletries. Hence, Nordstrom could have to change its business model to selling clothes and other goods Amazon has trouble marketing.

Finally, Amazon is making a major fashion push with its own private label brands and Amazon Wardrobe. I think Amazon Wardrobe threatens Nordstrom because it will attract the business of professionals who hate to shop. Body Labs could make Amazon Wardrobe more competitive by offering fast tailoring with Prime Delivery.

Is Nordstrom a value investment?

Observers will ask is Nordstrom a value investment because of its low stock; $40.62 on 6 May 2019?

Currently, I say yes because of Nordstrom’s 37₵ last paid on 26 March 2019. However, that dividend has not grown since 2015 when it was 34₵. Moreover, that dividend is not likely to grow soon because of Nordstrom’s falling cash flow.

Yet, Nordstrom shareholders received a 3.64% dividend yield, an annualized payout of $1.48, and a payout ratio of 41.5% on 6 May 2019. Hence, Nordstrom is a decent cheap income stock. However, Nordstrom is a perilous stock because it operates in a highly stable sector that is changing beyond recognition. Thus, investors had better be ready to dump Nordstrom (NYSE: JWN) fast.