Toronto Star

Big, beautiful storefront­s are losing ground — fast

Nordstrom’s edge in the battle for sales has come at a cost of high expenses, weak profit


SEATTLE— For many years, Nordstrom has been regarded as a poster child for how traditiona­l retailers should respond to the rise of e-commerce.

But, as the past year has shown, even Nordstrom isn’t immune from the larger forces rocking brickand-mortar retailers these days, with department stores hit particular­ly hard.

While Nordstrom’s total sales in the U.S. have risen over the past year, its profits have not.

And perhaps most worryingly, sales at the company’s full-line stores — the big downtown or mall anchor operations in the U.S. that bring the bulk of Nordstrom’s business and have shaped its reputation for stellar customer service — have logged fivestraig­ht quarters of year-over-year declines.

Whether that extends into a sixth quarter, including the all-important holiday shopping season, will be revealed Thursday, when Seattle-based Nordstrom reports its fourth-quarter and year-end results.

“The scary thing for retailers is: What if you did everything right and you’re still performing poorly?” said Neil Stern, an analyst with retail consultanc­y McMillanDo­olittle. “Which, I think, is kind of the Nordstrom story right now.”

Since early on in e-commerce’s transforma­tion of retailing, Nordstrom has invested heavily in technology, improving its website, pushing out new mobile shopping features, and integratin­g its online and instore inventory systems. It also grew its assortment of merchandis­e online and expanded its warehouses to handle more Internet orders.

That paid off as Nordstrom outshone other retailers and grew its online sales, a rapid growth that’s continuing even now. But it’s come at a price — namely, higher expenses.

And Nordstrom, like other retailers, is being buffeted by a sea change in consumer spending habits.

It’s not just that purchases are increasing­ly shifting online. It’s also that mall traffic in the U.S. is reportedly declining, shoppers are more apt to flock to discounter­s such as T.J. Maxx, and consumers are looking to spend money on experience­s rather than things.

The recent news from other retailers south of the border has been gloomy. Macy’s, Sears, Kohl’s, J.C. Penney and Target all reported weak-to-dismal holiday sales. Macy’s and Sears also announced dozens of store closures nationwide.

“The scary thing for retailers is: What if you did everything right and you’re still performing poorly?” NEIL STERN ANALYST

Even Amazon, whose sales soared in the holiday quarter, couldn’t meet Wall Street’s revenue and profit expectatio­ns.

While Nordstrom has announced a few store closures over the years, including one full-line store in San Diego last year and one slated to close this year in Santa Ana, Calif., it has not announced more widespread closures along the line of Macy’s or Sears/Kmart. In fact, in Canada, it’s opened five stores since 2014, and is set to open a sixth in September.

Nonetheles­s, Nordstrom said earlier this year that “we’re always keeping a pulse on performanc­e and realestate agreements.”

Nordstrom realizes it needs to make some changes — fast — and has started to do so. But it’s an open question whether the company can turn around the sales trajectory, especially at its full-line U.S. stores, and whether it can do so fast enough. It’s hardly alone. “A lot of retailers are flailing,” Stern said. “They know they need innovation, something breakthrou­gh, but they don’t know quite how to do it.”

Judging solely by overall sales, Nordstrom has not done badly, logging year-over-year quarterly revenue increases for much of the last two years.

For the nine months ended Oct. 29 — the latest reported — the company logged net sales of $10.26 billion (U.S.), up 3 per cent from a year ago. (Overall revenue, including creditcard revenue, was up 1.9 per cent.)

In comparison, Macy’s net sales during that same period fell 5.2 per cent, while Kohl’s declined 2.6 per cent.

But Nordstrom’s profits were a different matter. Though the company remained profitable throughout most quarters of the last two years, the profit declined in many of those quarters.

For the latest nine months reported, Nordstrom saw its profit fall nearly 64 per cent, to $153 million.

There are several reasons for the gulf between top-line and bottomline results during those months.

The company’s $197-million writedown last quarter for its $350-million purchase of online retailer Trunk Club in 2014, was a hit to its bottom line. Without that writedown, Nordstrom would have logged aprofit, rather than loss, that quarter.

Higher markdowns on items to reduce inventory also ate into profits. Store openings — Nordstrom opened 26 new stores, including three full-line stores and 23 Nordstrom Rack off-price stores — undoubtedl­y boosted overall sales. But more stores meant more operating expenses.

And “Nordstrom’s full line stores are expensive to open and operate, and they take time to get up to speed and make a full contributi­on to the bottom line,” said Neil Saunders, managing director of retail for research firm GlobalData.

Meanwhile, the soaring, mostly double-digit growth in sales at Nordstrom’s online sites has cost the company. Revenue from, Nordstromr­ and flashsite sale HauteLook represente­d a fifth of Nordstrom’s overall sales, Mike Koppel, the company’s chief financial officer, said early last year. That was up from 8 per cent five years ago.

But building out that e-commerce infrastruc­ture, and factoring in the online business model, which has a “high variable cost structure driven by fulfilment and marketing costs,” has meant that “expenses in recent years have grown faster than sales,” Koppel said.

Deriving one-fifth of its sales from e-commerce is good, said Stern of McMillanDo­olittle. But growing ecommerce with great customer service — such as with free shipping and free returns — “it costs you,” Stern said. “Those sales today are not as profitable as brick-and-mortar sales. That’s the trap Nordstrom is in right now.”

To curb some of those expenses, Nordstrom cut up to 400 positions last year, representi­ng about 6 per cent of its workforce, and laid off 120 tech staffers. Last spring, executives also said they were looking at more cuts in the company’s alreadytri­mmed $4-billion, five-year capital-expenditur­e plan.

But it still will have sizable capital expenditur­es in the coming years, not least for the 363,000-square-foot flagship store it’s building in Manhattan, which is expected to open in 2019. Nordstrom has not said how much it’s spending on that flagship, but its five-year capital plan included an estimated total of $1.1 billion for both the Manhattan store and its recent expansion into Canada.

Nordstrom also faces a formidable competitor in Amazon, which is already the country’s biggest seller of clothes online and is likely to overtake Macy’s this year as the overall biggest seller of apparel in the U.S., according to Cowen and Company.

Amazon, with its one-hour delivery and other innovation­s, is “erasing by the minute” whatever advantages physical stores might claim, such as the immediate gratificat­ion of being able to buy something to take home, said Stern.

Perhaps most troubling for Nordstrom is that its full-line U.S. stores have seen comparable sales declines each quarter since the one that ended in October 2015.

Nordstrom executives have tied much of that drop to a fall in mall traffic and have made moves to counter that.

The company has expanded its loyalty program to allow customers without a Nordstrom credit card to earn rewards — aiming to capture the one-fifth of Nordstrom customers who are not part of its loyalty program. Program members spend four times as much and make four times as many trips as non-members, executives have said.

The company has also focused more on limited-distributi­on collaborat­ions with younger-skewing, indemand brands including Madewell, Topshop and Brandy Melville — a tactic that Nordstrom says is working well.

Nordstrom is also hoping for higher-level ideas, recently creating the new position of chief innovation officer. It tapped a longtime company executive to fill the role, leading a team charged with finding better ways to tie together its full-line, instore experience with its online experience.

“The way customers are choosing to shop in a more digitally connected world continues to change, and we know we need to find ways for our stores to evolve with them,” Erik Nordstrom, company co-president, said in a statement about the new position. “This is a challenge but we also see a tremendous opportunit­y to leverage our stores in ways that will allow us to serve customers into the future better than anyone else.”

Nordstrom did not make executives available for this story.

“(Online) sales today aren’t as profitable as brick-and-mortar sales. That’s the trap Nordstrom is in right now.” NEIL STERN ANALYST

 ?? GENE J. PUSKAR/THE ASSOCIATED PRESS FILE PHOTO ?? Sales at Nordstrom’s full-line stores — which bring the bulk of its business — have logged five straight quarters of year-over-year declines.
GENE J. PUSKAR/THE ASSOCIATED PRESS FILE PHOTO Sales at Nordstrom’s full-line stores — which bring the bulk of its business — have logged five straight quarters of year-over-year declines.

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