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JWN AT A GLANCE

P/E ► 19.6 AVG EV/EBITDA ► 9.86 AVG ROA ► 7.6% AVG ROE ► 26.1% AVG Debt to Equity ► 3.67 VERY HIGH Current Ratio ► 1.90 AVG Interest Coverage Ratio ► 4.69 AVG

 

 

 

 

 

 

Nordstrom (NYSE: JWN) sells apparel, shoes, cosmetics and accessories to customers who are typically between 25-54 years of age and generate a household income in excess of $100,000.^[1] The company positions itself as an "affordable luxury" retailer that operates all 109 of its Nordstrom full-line department stores in the U.S. exclusively. At the end of FY2008, the company also operated 58 off-price Nordstrom Rack stores and two clearance stores called Last Chance.^[2]

In 2008 Nordstrom's total sales decreased 6.3% from the previous year to $8.3 billion.^[3] The company experienced a larger decline in net sales compared to some of its main competitors on the basis of the crucial same store sales retail metric-- Nordstrom's 9.0% decline in same store sales in 2008 ^[3]put it below Saks' -6.1%^[4] and Macy's -4.6% decline in same store sales.^[5] A portion of this difference can be attributed to its fashion focus on "wear-to-work" apparel, which it offered under its own private label.

The company averaged 7.4% annual revenue growth from 2004 until 2007, reflecting the growing demand in its "affordable luxury" products. However, near-luxury and discount retailers, Nordstrom is vulnerable to slowdowns in consumer spending on such merchandise, which typically exaggerates the peaks and valleys of the overall economy. Consequently, as the economy has slowed down since the subprime lending crisis in the summer of 2007, Nordstrom's sales in 2008 declined for the first time by 6.3%. The trend of declining sales continued until the third quarter of 2009 as the company reported a quarter increase of 4.5% in net sales compared to net sales in the previous year's quarter.^[6]

Company Overview

Based in Seattle, Washington, Nordstrom has developed its own niche in the retail industry as an "affordable luxury" retailer, positioned between mid-tier retailers such as the Macy's Inc. (M) stores and high-end, luxury retailers, including Saks Fifth Avenue and privately-held Neiman Marcus. The company sells high-quality apparel, shoes, cosmetics and accessories, targeting customers between 25-54 years of age with an average household income of $100,000.^[1]

Business Segments

The company operates through two principle branches:

Retail Stores, Direct, and Other (96% of net sales)^[2]

• Retail Stores: Nordstrom primarily gets its revenues from sales of high-quality apparel, shoes, cosmetics and accessories. This includes sales from all 109 Nordstrom full-line stores, 58 off-price Nordstrom Rack stores, two clearance stores that operate under the name Last Chance, and two Jeffrey boutiques.

The company's stores sell merchandise in seven different categories:^[7]

1. Women's Apparel: 34% of net sales
2. Shoes: 21% of net sales
3. Men's Apparel: 16% of net sales
4. Women's Accessories: 12% of net sales
5. Cosmetics: 11% of net sales
6. Children's Apparel: 3% of net sales
7. Other: 3% of net sales

More than half of Nordstroms revenues come from the sale of women's products (including cosmetics). ^[7]

• Direct: Nordstrom also sells its merchandise through its e-commerce website Nordstrom.com and catalogs.

• Other: This segment involves the product development and design team, Nordstrom Product Group and corporate center operations

Credit (4% of net sales)^[2]

• Credit: In owning its own federal savings bank, Nordstrom offers a private label card, two co-branded Nordstrom VISA credit cards and a debit card for Nordstrom purchases. These give rise to a shopping-based loyalty program designed to create incentives for increased customer consumption.

Sale of Façonnable Brand

In July 2007, Nordstrom announced that it was selling its designer brand Façonnable for $210 million to a Lebanese company that wanted to significantly expand the line. The Façonnable brand consisted of conservative pants, skirts, blazers and shirts and was sold in more than half of Nordstrom's stores and in Façonnable boutiques-- the company operated four boutiques in the U.S. and 37 in Europe. The divestment away from the brand allowed the company to focus more on its core business within the United States.^[8]

Store Expansion

At the end of 2008, the company operated 171 stores in 28 states, which a majority of them being on the west or east coast (59 of the stores are located in California alone). In 2008, Nordstrom opened eight full-line stores and six Rack stores. However, as a result of the economic recession, the company plans to open only three full-line stores and ten Rack stores in 2009-- more Rack stores indicate that consumers are leaning to discounted off-price stores. The company is also scheduled to open three full-line and four Rack stores in 2010. ^[9][2]

Business Growth

FY 2008 (ended January 31, 2009)^[3]

• Nordstrom's net income dropped 43.9% in 2008 from $715 million in 2007 to $401 million in 2008. The large decrease can be attributed to the effect the economic recession had on consumer spending on high-end goods.

• Net sales fell 5.6%. Lack of growth was reflected by comparable store sale decrease of 9.0% for the year. However, Rack stores had a 3.1% increase in same store sales, which indicated that consumers were leaning more towards buying discounted products.

• Operating margin for the year was 9.1% compared to 13.7% in 2007, a 4.6% decrease as a result of higher operating expenses.

• There was an 9.0% decrease in comparable store sales in 2008, compared to an increase of 3.9% in 2007.

• Nordstrom opened 14 new stores in 2008 but only plans to open 13 in 2009.

Q3 2009 (ended October 31, 2009)^[6]

• Nordstrom's net income increased 16.9% as compared with the previous-year fiscal quarter, from $71 million in Q3 2008 to $105 million in Q3 2009, despite lower demand for high-end apparel and consumer goods during the recession.

• Net sales were $1.96 billion in Q3 2009, up 4.5% from net sales of $1.88 billion in Q3 of the previous year. In a challenging recessionary environment, Nordstrom typically suffers from low consumer demand for its mid-to-high-end merchandise and struggled to adjust inventory levels and reduce costs. However, during the quarter, sales increased due to a higher volume of sales at the company's discount Rack stores.

• Sales, General and Administrative (SG&A) expenses increased $10 million during the quarter.

• Comparable store sales fell 1.2% compared to the previous year's quarter. Comparable store sales for the company's full-line stores decreased 4.2% whereas comparable store sales increased 3% for the company's discount Rack stores; this is the third straight quarter that same store sales have increased for Rack stores.

Some data is not currently available because the company has not filed its SEC quarterly report (10-Q form) for the quarter ended on October 31, 2009. This chart will be updated once the company has done so. Thanks for your patience.

Trends and Forces

Near-Luxury Retailers Suffer in Struggling Economy

High-end luxury retailers, like Louis Vuitton and Tiffany's, that have customers with individual net worths in the millions of dollars and incomes that remain high regardless of economic conditions are not very effected by economic recessions.^[10] In 2008, Louis Vuitton's net sales increased by €712 million ($993 millilon) or 4.3%.^[11]

However, near-luxury retailers, like Nordstrom or even Abercrombie & Fitch, that depend on aspiring middle class customers -- customers that are affected by recessions and cut back on spending -- are the ones that suffer through tough economic times. ^[12] Nordstrom had net sales and net income fall by 5.6% and 43.9% respectively in 2008.^[3] In addition, same store sales for Nordstrom's stores fell by 9% in 2008; however, Nordstrom's off-price chain Nordstrom Racks had a 3.1% increase in same store sales, further showing that aspiring middle-class consumers are looking for bargains during the economic recession.

In order to help struggling US sales, in November 2009 Nordstrom expanded its international business by making international shipping available to 30 countries. ^[13]

Weak Economy Brings Discount Retailers into Competition

Although Nordstrom is a near-luxury retailer which operates 109 full-line stores, the company also runs an off-price chain with 58 stores called Nordstrom Rack which sells products at a discounted price.^[9] Due to the economic recession, consumers are looking to save more and get the most out of whatever they spend and as a result, are flocking to discount stores like Nordstrom Rack and Kohl's.^[14] This means that more emphasis is being placed on the company's competition with discount retailers. The company has responded to this new trend by increasing the number of new Rack stores it opens-- in 2008, the company opened six new Rack stores and plans to open ten in 2009. The emphasis in opening new Rack stores is apart of the company's new five-year strategic growth plan in which they plan to open 28 Rack stores by 2013.^[15]

Department Store Migration to Off-Mall Locations

At the end of 2008, nearly half of Nordstrom's stores were located in off-mall locations and is keeping up with competitors with regards to a growing emphasis on off-mall store locations. For example, off-price competitor Kohl's (KSS) is a leader in the off-mall trend, operating 938 of its 1004 stores in off-mall locations at the end of 2008.^[16] Main competitor J.C. Penney (JCP) operated 1,093 stores at the end of FY08, only 91 of which were off-mall,^[17] but, JCP is trying to catch up to companies such as Nordstrom and Kohl's, as 31 of their 35 new stores in 2008 were off-mall. In 2009, 16 out of the 17 new stores JCP plans to build will be off-mall.^[18] As Nordstrom is right in the middle of its competitors with regards to this trend, it is positioned to retain its market share from its competitors as consumers continue to shop more often in off-mall locations, refraining from frequenting malls and subsequently avoiding some of Nordstrom's stores.

Since the 2000's began, consumers have shifted their shopping habits to strip-malls and shopping centers rather than traditional malls.^[19] Department stores are traditionally attached to malls, but have begun moving out into shopping centers and other "off-mall" locations to follow the changing customer's shopping patterns. Off-mall stores are cheaper to operate than traditional mall-based department stores, due to smaller real estate costs and less in-store employees, and offer consumers convenience by serving as a one stop shop. Since nearly half of Nordstrom's stores are located in off-mall locations, the company will be able to take advantage of this new trend.^[20]

Competition

Nordstrom's competitors in the mid-tier department store industry include Macy's Inc. (M), Dillard's (DDS) and J.C. Penney (JCP). These companies provide near-luxury full-price items but also have discount stores as well. Mid-tier department stores are the most affected by the economic downturn because they rely on aspiring middle income consumers to generate revenue-- middle income consumers typically cut back spending and look for discounts as a way to save money during tough economic times.^[21]

Nordstrom also competes with companies in the luxury retail industry which include Saks Fifth Avenue (SKS) and companies in the discount retail industry like Kohl's (KSS). Nordstrom occupies a positioning between discount and luxury department stores in terms of the price it sells its merchandise at.

• Macy's Inc. (M) is a mall-based department store chain and carries a very comparable variety of branded merchandise as Nordstrom, with extensive offerings from Polo Ralph Lauren (RL), Calvin Klein, Kenneth Cole Productions (KCP) and other fashion brands. Macy's is far larger than Nordstrom in terms of sales ($24.9 billion in FY08) and number of stores (847 at end of FY08).^[22]

• J.C. Penney (JCP) is significantly larger than Nordstrom, with far greater 2008 sales and stores than Nordstrom ($18.5 billion; 1,093).^[23] J.C. Penney's prices are comparable to Nordstrom but JCP carries less prominent brand name merchandise.

• Dillard's (DDS) operates a chain of department stores across the U.S., with 315 stores open nationwide as of January 2009, all of which were located in malls. ^[24] Dillard's targets middle- and upper-class consumers with premium-priced branded and private label clothing. Dillard's $6.8 billion of sales in 2008 place it relatively close to that of Nordstrom.^[25]

• Saks (SKS) sells luxury apparel, shoes, jewelry and accessories in the U.S and around the world. The company has 54 stores, with its top-tier Saks Fifth Avenue chain having locations in Saudi Arabia, the United Arab Emirates, Mexico City and China. The company generated $3 billion in sales in 2008.^[4]

• Kohl's (KSS) appeals to middle-class consumers with discounted branded and private label clothing and home goods, and its $16.4 billion of sales in 2008 place it well ahead of Nordstrom. The company operates over 1,000 stores most of which are in off-mall locations.^[26]

References

1. ↑ ^{1.0 1.1} Seattle Post-Intelligencer "Earnings: Nordstrom raises profit expectations" 16 Aug 2007
2. ↑ ^{2.0 2.1 2.2 2.3} JWN 2008 10-K, pg. 4
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} JWN 2008 10-K, pg. 14
4. ↑ ^{4.0 4.1 4.2} SKS 2008 10-K, pg. 23
5. ↑ M 2008 10-K, pg. 18
6. ↑ ^{6.0 6.1 6.2} JWN Q3 2009 Report
7. ↑ ^{7.0 7.1} JWN 2008 10-K, pg. 16
8. ↑ Market Watch "Nordstrom in pact to sell Faconnable" 26 July 2007
9. ↑ ^{9.0 9.1} JWN 2008 10-K, pg. 10 and 11
10. ↑ WSJ Blogs "Wealthy See Recession as Optimism Flags" 7 May 2008
11. ↑ LVMH 2008 Annual Report, Financial Documents, pg. 2
12. ↑ CBS News "Luxury Items Still Selling In Tough Times" 28 July 2008
13. ↑ Yahoo Finance "Nordstrom Launches International Shopping in 30 Countries" 4 November 2009
14. ↑ iStockAnalyst "Economy Drives Shoppers to Discount Stores" 22 Nov 2008
15. ↑ JWN 2008 10-K, pg. 6
16. ↑ KSS 2008 10-K, pg. 13
17. ↑ JCP 2008 10-K, pg. 8
18. ↑ JCP 2008 10-K, pg. 30
19. ↑ USA Today "Shopping shifts to 'off-mall' stores" 25 April 2004
20. ↑ Zacks "Saks & Nordstrom Hit Outlet Malls" 13 April 2009
21. ↑ New York Times "Americans Cut Back Sharply on Spending" 14 Jan 2008
22. ↑ ^{22.0 22.1} M 2008 10-K, pg. 15
23. ↑ ^{23.0 23.1} JCP 2008 10-K, pg. F-3
24. ↑ DDS 2008 10-K, pg. 8
25. ↑ ^{25.0 25.1} DDS 2008 10-K, pg. 22
26. ↑ ^{26.0 26.1} KSS 2008 10-K, pg. 18