Nordstrom, Inc. (NYSE:JWN)’s expansion plans indicate that the company is confident in its future potential. Most retailers are closing stores, not opening new ones. Nordstrom’s decision is a good sign, but risks exist. Perhaps another retailer offers a better opportunity.
Canadian expansion
Nordstrom crosses the Northern border in 2014 with a location at Chinook Centre in Calgary. It will follow that up in 2015 with locations at Pacific Centre in Vancouver and Rideau Centre in Ottawa. All of these locations formerly belonged to Sears Holdings Corporation (NASDAQ:SHLD). Since all of the aforementioned malls are high-end, Nordstrom will have more potential than Sears. Two new locations will open in 2016 — Sherway Gardens in Toronto and Toronto’s Yorkdale Shopping Centre.
Nordstrom, Inc. (NYSE:JWN) and Hudson Bay’s Lord & Taylor have competed for many years in the United States. Hudson Bay CEO, Richard Baker, doesn’t seem thrilled with Nordstrom’s expansion plans into Canadian territory, commenting: “Hudson Bay is a promotional retailer and every day there is a different kind of exciting promotion going on, and that is what drives our business. Nordstrom is a full-price retailer with a sale twice a year.”
Nordstrom, Inc. (NYSE:JWN) actually offers five sales per year, but his point is obvious — Nordstrom isn’t the place to go if you’re looking for value. However, that’s not the case in July, when Nordstrom celebrates its Anniversary Sale. During this time, you can purchase fall items for tremendous discounts, earn double points on your Nordstrom card if you shop on the weekend, and set up appointments with sales associates.
Nordstrom, Inc. (NYSE:JWN)’s strategy with the Anniversary Sale is to get former shoppers back into the store as well as to attract new ones. While the sale might not lead to great margins, these shoppers are likely to browse higher-margin items. A new shopper might also be impressed with what he or she sees and return to the store at a later date.
This is how Nordstrom competes on the promotional front. By keeping sales sporadic, it makes them special events that shoppers can get excited about. You can look at it at as a supply and demand situation: Fewer sales equals increased demand for sales.
In the United States, Nordstrom, Inc. (NYSE:JWN) plans on opening 14 more stores this year and 30 stores in 2014. Currently, 240 Nordstrom stores can be found in 31 states. Nordstrom operates 34 stores in California, but the second-most popular state for Nordstrom is Texas with only 10 stores. Therefore, domestic growth potential is good.
Nordstrom’s recent performance
Nordstrom, Inc. (NYSE:JWN) is well known for its exemplary customer service. In the employee handbook, it simply reads: “Trust Your Judgment.” This demonstrates the company’s trust in its employees, which leads to an excellent working environment and company culture. This positive attitude is contagious, and it spreads to the customers. This, of course, leads to strong sales.
Same-store sales increased 2.7% year-over-year in the first quarter, but expansions, promotions, and spending on e-commerce and technology led to increased costs. These costs are short-term negatives, and they shouldn’t play a role in your investment decision.
Full-year guidance disappointed with sales growth expectations moving from a range of 4.5% to 6.5% to a range of 4% to 6% and same-store sales going from between 3.5% and 5.5% to between 3% and 5%. However, Nordstrom reiterated EPS guidance at $3.65 to $3.80.
Nordstrom vs. peers
Nordstrom, Inc. (NYSE:JWN) is a higher-end option than Macy’s, Inc. (NYSE:M) and J.C. Penney Company, Inc. (NYSE:JCP) for shoppers (although Macy’s does own Bloomingdales). The current economic environment has led to success for Nordstrom as most wealthy individuals have increased their annual income through stock and real estate investments. That said, Macy’s has also performed well over the past five years. Below is a chart comparing stock performances and profit margins for all three companies:
It should come as no surprise that J.C. Penney owns the highest short position of 23.5% versus 3.6% for Nordstrom and 2.7% for Macy’s. J.C. Penney is a high-risk investment since no one knows if its turnaround (back to its original form) will be successful.
J.C. Penney Company, Inc. (NYSE:JCP) also doesn’t offer any yield, whereas Nordstrom and Macy’s both yield 2.1%. Unless you’re gambling, J.C. Penney should be removed from investing consideration. That said, if J.C. Penney is successful with its turnaround, then the upside potential is significant. J.C. Penney has suffered from two consecutive years of revenue and earnings declines, and same-store sales dropped 16% in the first quarter year-over-year. J.C. Penney is attempting to win back its former customers through an ad campaign.
Macy’s, Inc. (NYSE:M) has consistently improved its revenue and earnings over the past several years, and it caters to both high and middle-income consumers with Macy’s and Bloomingdales. This diversification combined with quality management should lead to long-term success. However, keep in mind that retail doesn’t hold up well at all if the economy tanks.
Conclusion
Nordstrom, Inc. (NYSE:JWN) is an extremely well-run operation with strong future potential. At the same time, the stock declined more than 50% during the financial crisis of 2008 and 2009. If a similar environment were to present itself in the future, then Nordstrom would be far from a safe investment. If you’re goal is capital preservation and small yet safe gains, then Nordstrom should be avoided.
If you believe that the stock and real estate markets will hold their own, and that the job market will improve, then Nordstrom should be strongly considered as an investment option. It’s one of the best retailers in existence.
The article Risky and Exciting Retail Investments originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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