Nordstrom stands out among faltering department stores

Dive Brief:

  • Nordstrom on Thursday reported second quarter earnings of 65 cents per diluted share, as total net sales rose 3.5% to $3.7 billion from $3.6 billion in the year-ago period. Same-store sales rose 1.7% percent as the company held its maintained discipline in inventory and expenses.

  • Full-line Nordstrom stores including in the U.S. and Canada and at Nordstrom.com (including Trunk Club), sales rose 2.4% and their same-store sales rose 1.4%, according to a company press release, thanks in part to strong sales in women’s apparel and beauty. Three of Nordstrom’s own proprietary labels were among its top five selling brands, executives said. Full-line same-store sales alone fell 4.4%, beating beating Gordon Haskett analyst Chuck Grom’s estimate for a 4.5% decline.

  • At its off-price Nordstrom Rack brand, including Rack stores and Nordstromrack.com/HauteLook, net sales rose 9.8% and same-store sales rose 3.1%, beating the Gordon Haskett estimate for 2.5%. In e-commerce, Nordstromrack.com and HauteLook sales rose 27% and Nordstrom.com rose 19.8%, beating Gordon Haskett’s estimate for a 9% rise. Same-store sales at brick-and-mortar Rack outlets fell 1.0%.

Dive Insight:

Nordstrom Co-President Blake W. Nordstrom told analysts on Thursday that the company views its operations in terms of full-line and off-price brands, rather than by offline or online channels, emphasizing the importance of its brick-and-mortar stores for all sales. “The combination of our physical and digital assets represents a competitive advantage,” he said, according to a transcript from Seeking Alpha. “Our local market assets, our stores, salespeople, product and services, are the core of our brand and play an important role in engaging with our customers. Nearly 80% of customers who shop with us across multiple channels began in our stores.”

The strategy is leading Nordstrom to expand its footprint. To date in fiscal 2017, the department store company opened six Nordstrom Rack stores (one in the second quarter) and closed one full-line store, for a total of 117 U.S. full-line stores and five in Canada, and a total of 221 Rack stores. The company, calling its Rack business “an important way to attract new customers to Nordstrom,” will open 11 more off-price stores this fall for a total of 232 by year’s end.

Nordstrom is helping stores with omnichannel services, expanding its Reserve Online & Try in Store service from six stores in Seattle to add four in Chicago, with plans to feature it in some 50 stores by year end. “We’ve been encouraged to find that around 80% of customers, who try this service, choose to shop this way again,” Nordstrom said.

The company’s highly anticipated Anniversary Sale performed better this year than in recent years, he also said, adding that its 9.4 million active loyalty rewards customers represent an increase in the program of 50% from the 6.2 million a year ago and delivered 56% of the company’s Q2 sales, up from 48% a year ago.

The results were a “ray of sunshine” at a time of disappointing department store sales, according to GlobalData Retail Managing Director Neil Saunders, saying that the company is showing “that even in a challenging market, getting the strategy right can, and does, make all the difference.”

Nordstrom’s standout results in the challenged department store and apparel markets isn’t mere luck, Saunders said in a note emailed to Retail Dive. “[T]he company has, for a long time, invested in its retail proposition and has taken sound strategic decisions like the diversification into off-price and the development of an omnichannel plan,” he said. “These steps are paying dividends and are ensuring that Nordstrom remains relevant even as the retail sector continues to change rapidly.”

It’s also important to note the success of Nordstrom’s own labels within its overall strategy, according to Saunders. “One factor aiding customer retention is a focus on uniqueness and differentiation, especially in fashion,” he said. “As many retailers suffer from the withdrawal of premium brands — which they relied on to drive footfall — Nordstrom has actively developed its own proprietary labels. This has allowed the company to stand out in a sea of sameness and has given customers a reason to visit, especially during the company’s big annual sales event.”

Not all is rosy: Saunders pointed to the same-store sales decline at Nordstrom stores and even at Rack stores, and said that GlobalData Retail finds Rack continuing to cannibalize the flagship brand. “[B]ut the most important point is that across all of its channels, Nordstrom is doing a good job of retaining customers and their spend,” he said.

But though the company managed to protect its margins to some extent, even in the period that included its famous Anniversary Sale, the bottom line is still suffering. Retail gross profit as a percentage of net sales of 34.1% declined 25 basis points compared with the same period last year, mostly due to new store growth for Nordstrom Rack and Canada and higher loyalty expenses during the Anniversary Sale (partially offset by improved merchandise margins, reflecting the success of decreased discounts).

E-commerce is also taking a toll, as selling, general and administrative expenses, as a percentage of net sales, of 30.3% increased 46 basis points compared with the same period last year, due to technology and supply chain expenses. And the company continues to be buffeted by its $197 million write-down of Trunk Club last year, contributing a 310 basis points decline to its return on invested capital for the 12 fiscal months ended July 29, which landed at 8.9% compared with 9.1% in the prior 12-month period, the company said. Saunders called that “disappointing” but said that would likely moderate over the course of the year.

The fact remains though, that Nordstrom stands out in the department store sector, and Saunders said that the company must continue to think long term. “Constant growth may not be the order of the day, but it remains clear to us that Nordstrom is on a much better trajectory than most other players in the department store segment,” Saunders said. “Continuation on this path relies on sensible investments and the prioritization of long term decisions over short term gains. The Nordstrom family know this, which is one of the reasons why they looked into taking the company private. Whatever the outcome of that process, Nordstrom should not be tarred with the same brush as other department stores. The market should recognize its difference and its efforts to stay ahead of the pack.”

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