Market Mad House

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

Market Insanity

What is happening at Nordstrom?

The retail apocalypse is harming even good, money-making department brands such as Nordstrom (NYSE: JWN). The family behind the upscale department store cannot find the money to take their company private.

The private equity firm Leonard Green has not been able to secure enough debt financing for the deal, CNBC reported. The most likely problem is that investors are afraid to touch Nordstrom’s stock because it is a department store.

Even though Nordstrom shares were trading at $42.30 on 12 October 2017, it is stuck in a segment that includes such turkeys as JC Penney (NYSE: JCP) and The Bon-Ton Stores (NYSE: BONT). Penney’s was trading at $3.39 a share on 12 October and Bon-Ton had sunk to a new low of 38.99¢ a share on the same day.

It looks as if the Nordstrom family might have waited too long to go private. The deadwood in the rest of the market is dragging down its’ brand and stock value. Financiers might be afraid to touch Nordstrom because they fear its’ value will sink to JC Penney or Bon-Ton levels in the near future.

Even Good Stores Suffer in the Retail Apocalypse

The situation at Nordstrom is teaching a hard lesson that all investors need to learn. It is even good stocks and brands will suffer in the retail apocalypse.

Nordstrom is a great brand and it is on the cutting edge of retail. The company has opened a brilliant next-generation store called Nordstrom Local in North Hollywood, California.

Nordstrom Local is brilliant because it has no merchandise for sale and it is small, just 3,000 square feet in area. Instead, customers come in for services like returns, pickups, tailoring, and manicuring. There’s even a bar where customers can buy drinks or food. There will also be dressing rooms so customers can try clothing.

Nordstrom demonstrates the future of Retail

The concept is clever because it allows Nordstrom to expand, and take advantage of all the empty storefronts created by the retail apocalypse. It can move into new malls, new towns, and numerous other places.

Some logical places for Nordstrom Local include small towns, resort towns, downtowns of big cities, train stations, resorts, casinos, supermarkets, Walmart supercenters, Kroger Marketplaces, hotels, and airports. Markets Nordstrom might tap with this include places like Canon City, Colorado, where a local lady was complaining there was no place but Walmart to buy clothes in town.

The 3,000-square foot local stores would be an excellent way to capitalize on all the places where traditional department stores like Penney’s and Macy’s are pulling out. Nordstrom can swoop in and grab their customers without a lot of labor costs or the expense of setting up and stocking a full department store.

Another great use for Nordstrom Local would be as a showroom for products sold by online retailers such as Amazon (NASDAQ: AMZN). Nordstrom is already doing some of this in its stores by tapping brands like Bonobos.

This also points to another place where the Nordstrom family can get the money to go private: Amazon. They can sell out to Amazon like Whole Foods did or arrange a private equity deal in which they will sell Amazon merchandise through the local stores. Another potential partner here is Walmart (NYSE: WMT) which is trying to attract more upscale customers with more money.

Nordstrom is Still a Good Value Investment

The local concept proves that Nordstrom has good management, but it’s also a company in trouble.

Nordstrom’s net income basically collapsed in the last two years. Back in July 2015, it reported $736 million in income, that fell to $424 million in July 2016, and $364 million this year. That collapse in spite of steady revenue growth over the same period.

Nordstrom reported revenues of $14.10 billion in July 2015, $14.42 billion in July 2016, and $15.01 billion on July 31, 2017. This company has managed to increase its sales and revenues but it is still making less money.

That justifies the Local experiment; Nordstrom needs to dramatically cut expenses if it wants to survive. Simply growing revenues is not enough, radical cost control is needed which is what Local might provide.

Is Nordstrom Generating Cash

Okay, so Nordstrom is growing and making money but is it generating enough cash to pay for an experiment like Local. The answer is maybe if it can keep costs down and find some deep-pocketed benefactors.

Nordstrom reported $297 million in free cash flow on July 31, 2017, which is down from $478 million on the same date last year. It also reported $919 million in cash and short-term investments on the same day which is good.

The real problem is cash from operations which has basically collapsed. Nordstrom reported $2.892 billion in cash from operations in July 2016 and $1.366 billion in July 2017. That figure is down by nearly half in 12 months, which is frightening. If that kind of decline keeps up Nordstrom will have to start closing stores.

Why Nordstrom Stock will collapse

There is some other value at Nordstrom in the form of $8.161 billion in assets on July 31, 2017, and an enterprise value of $8.956 billion achieved on 12 October 2017. Mr. Market gave the company a capitalization of $7.035 billion on the same day.

This shows us that Nordstrom is a good brand and company but a lousy stock. It is in trouble despite the 37¢ dividend paid out on August 24, 2017. My advice would for investors to stay away because dividend cuts are probably next.

The most likely scenario at Nordstrom is a dramatic fall if the family cannot organize a private equity deal or some sort of arrangement with a giant like Amazon. Nordstrom is a great brand that will survive, but its stock price is likely to collapse and stay low for quite some time unless Local becomes a success. If it does, Nordstrom is likely to come roaring back, until then this company will struggle.