Nordstrom Profits from Income Inequality and Bucks the Trend in the Department Store Business

Income inequality actually seems to have been very good for business for one department-store brand: Nordstrom (NYSE: JWN). The upscale emporium has defied the trends in the sector with rising revenues, as middle-class oriented rivals struggle with falling sales.

Nordstrom’s revenues grew by $930 million in 2015, while Macy’s (NYSE: M) fell by $1.03 billion. Macy’s reported $28.11 billion in revenue in January 2015, and $27.08 billion a year later. Nordstrom started 2015 with $13.51 billion revenue in January, and finished the year with $14.44 billion in January 2016.

Revenues Fell During the Holiday Shopping Season

Revenue at Nordstrom actually increased steadily all year, rising from $13.51 billion in January to $13.79 billion in April, to $14.1 billion in July, to $14.29 billion in October. Meanwhile sales kept falling and falling at Macy’s. Macy’s started out with $28.11 billion in revenue in January that fell to $28.6 billion in April, $27.89 billion in July, and $27.57 billion in October.

These figures indicate that not even the holiday season helped Macy’s, its revenues actually fell during November and December. This disturbing trend was seen elsewhere in department stores including Dillard’s (NYSE: DDS); where revenue dropped from $6.817 billion in October to $6.755 billion in January.

Yet Nordstrom seems to have bucked this trend, as did discount department store operator TJX Companies (NYSE: TJX). TJX reported a revenue figure of $30.29 billion in October 2015 and one of $30.94 billion in January.

Is Nordstrom Immune to the Amazon Effect?

It looks as if some retailers are losing revenue during the holiday shopping season. Instead of increased sales generating more cash, some retailers are dealing with empty stores and unsold merchandise. The most likely cause of this is the Amazon Effect, with certain segments of the population shopping online instead of instore.

Amazon.com (NASDAQ: AMZN) did report a dramatic rise in revenue over the holiday season. In September 2015, Amazon reported revenues of $100.59 billion that increased to $107.01 billion in December.

The most obvious conclusion we can make from this is that retailers which cater to the middle are most vulnerable to the Amazon Effect. Nordstrom; which targets an upper class clientele, and TJX, owner of TJX Maxx a chain that sells clothes to the working class escaped the effect. The middle-class department store brands Macy’s and Dillard’s felt it.

The discount giant Target (NYSE: TGT); which also directs its marketing at the middle class, also reported a modest drop in revenue. Target reported revenues of $73.91 billion in October 2015 that fell to $73.78 billion in January 2016.

Why is Nordstrom Immune to the Amazon Effect?

Naturally many of you will wonder why would the Amazon effect hit Target, Macy’s and Dillard’s, but not Nordstrom or TJX? The most logical conclusion is that middle class families; which are most likely to be strapped for cash and time, have more incentive to shop online.

A major problem is that Amazon is a heavy seller of those items department stores specialize in such as clothing, shoes and small appliances. Why go to the mall and deal with the holiday crowds when you can get the same stuff at a good price online and have it delivered to your house.

Nordstrom avoids this because it caters to upper-class people that are willing to pay extra for a quality shopping experience. There is also element of class-consciousness here: a middle class person who shops at Amazon does not have to worry about the neighbors seeing her car in the discount store parking lot. In contrast, a woman that wants to establish her reputation as upper-class wants people to see her at Nordstrom. A working class person who does not care how the neighbors think is not ashamed of being seen at TJ Maxx.

Nordstrom’s Customer Base is Growing

This could mean that there are some serious limits to Amazon’s potential expansion. Another conclusion that we can draw from these revenue figures is that America’s changing class demographics are having an effect on the retail segment.

Tellingly the rich are now the fastest growing class in America according to the Pew Income study. Pew found that in 2001, 7% of Americans were in the highest income segment, that number grew to 8% in 2011 and 9% in 2015. Pew estimated that around 21% of Americans fit the description of upper class.

In contrast, Pew estimated that the percentages of Americans considered upper middle class and lower middle class remained stable. The upper middle class made up 12% of America’s households in 1981, 2011, and 2015, according to Pew. Around 9% of American households fit the description lower middle class in 1981, 1991, 2001, 2011, and 2015.

The Pew numbers indicated that the middle-class is shrinking which means fewer customers for Macy’s and Target. Around 61% of Americas were described as middle class in 1971, by 2015 that number fell to 50%.

The middle class also less money, Pew estimated that the median wealth of the average middle class family fell by 28% between 2001 and 2013. The average middle class family’s income fell by 4% during the same period.

Meanwhile the amount of money available to upper-income households (Nordstrom’s customers) increased. The upper class controlled 29% of America’s aggregate income in 1970 and 49% of the nation’s aggregate income in 2014.

Is Nordstrom a Value Investment?

The demographics indicate that Nordstrom’s customer base is growing and that those customers have more money. This retailer is in a very enviable position given America’s current state but is it a good investment?

Nordstrom did report a net income of $600 million, a free cash flow of $481 million, $2.451 billion in cash from operations and $595 million in cash and short-term investments on January 31, 2016. Those figures demonstrate that it generates some float, but not enough to be considered a value investment.

Shareholders were rewarded with a dividend yield of 2.86% and a return on equity of 30.72%. This makes Nordstrom a good dividend and growth stock with a lot of momentum, but not a value investment.

Nordstrom is also the only department store I would recommend, because it is not overpriced. Nordstrom shares were trading at $51.72 on April 15, 2016, giving the company a market cap of $8.943 billion on an enterprise value of $11.15 billion.

That means if you’re looking for a dividend stock with some momentum, you should take a look at Nordstrom. It is one retailer that is poised to profit from income inequality, and generate a healthy dividend in the process.