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Nordstrom, Inc. (JWN), The Gap Inc. (GPS), American Eagle Outfitters (AEO): Is This Specialty Retailer a Fashionable Investment?

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Nordstrom, Inc. (NYSE:JWN) is known as one of the strongest retailers you can find. This reputation is well deserved, considering the high-quality products, customer service, and shopping experiences it provides. However, there is one important factor that makes Nordstrom, Inc. (NYSE:JWN) at least somewhat risky.

Targeting the high-end consumer
Nordstrom, Inc. (NYSE:JWN) has benefited over the last five years thanks to its longtime niche: the high-end consumer. Since the depths of “The Great Recession,” the high-end consumer has emerged mostly unscathed, while the middle-class has had to cope with a stubbornly difficult job market, a 2% payroll tax increase, and high gas prices.

Nordstrom, Inc. (NYSE:JWN)This trend can’t last forever; something has to give. Either the middle-class consumer sees increased prospects in the job market or the high-end consumer begins to feel the pain of a broad stagnation in the economy.

Fear and greed
In the second quarter, net sales jumped 6.4% to $3.1 billion, and diluted EPS improved 24% to $0.93. A lot of this success had to do with Nordstrom’s Anniversary Sale falling in the second quarter. While comps improved 4.4%, this is a slowdown from the year-ago quarter, when comps improved 4.5%.

Nordstrom’s long-term strategy is to invest in its physical and online stores, and to expand in Canada. The latter will likely impact margins, but it should boost sales. Over the long haul, Nordstrom, Inc. (NYSE:JWN) expects high single-digit sales growth, and ROIC in the mid-teens.

As far as Nordstrom’s Canadian expansion, it plans on opening the first of five stores in the Fall of 2014. Nordstrom also expects to open 14 Nordstrom Rack stores in 2013. Additionally, Nordstrom, Inc. (NYSE:JWN) is expanding its partnership with Topshop, bringing its merchandise to 28 new stores (42 total). This has the potential to help sales.

In other important news:

Nordstrom saw an 18% bump in Fashion Rewards members, a big plus since these customers tend to shop more frequently and spend more money.

Direct Channel sales skyrocketed 37% thanks to an improved website and more merchandise offerings.

Nordstrom is opening a second fulfillment center, and a third is expected to be completed in 2015.

Related options
Many retail investors who consider Nordstrom, Inc. (NYSE:JWN) might also take a look at the The Gap Inc. (NYSE:GPS). The Gap Inc. (NYSE:GPS) is a larger company, sporting a market cap of $19.15 billion, versus a market cap of $10.93 billion for Nordstrom. It also operates in 90 countries, and it targets a much wider range of consumers with its extremely broad merchandise offerings.

With product and geographic diversification, as well as good quality at affordable prices, the The Gap Inc. (NYSE:GPS) is likely to be more resilient to market corrections than Nordstrom. That is especially the case in the current environment. We already know where the middle-income consumer stands. We don’t know how the high-end consumer will react if the economy suffers.

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