Why is Nordstrom Making Money?

Nordstrom Inc. (NYSE: JWN) keeps defying the odds in the department store business by making money.

Nordstrom generated a gross profit of $1.273 billion and a net income of $87 million in 2nd Quarter 2018. That is pretty extraordinary when competitors like JC Penney (NYSE: JCP) and Macy’s (NYSE: M) were struggling for survival.

More importantly, Nordstrom’s revenues grew by 6.71% between 2nd Quarter 2017 and 2nd Quarter 2018. JC Penney’s revenues grew by 1.77% during that period while Macy’s revenues grew by 3.57%.

To be fair that was the biggest revenue growth at Macy’s in sometime but it was still a little more than half what Nordstrom achieved. For the record 1st and 2nd Quarter 2018 were the first two periods of revenue growth Macy’s has seen in sometime. Macy’s lost revenues for the first three quarters of 2016.

How is Nordstrom Making Money?

One has to wonder how Nordstrom is thriving when such iconic names as Sears (NASDAQ: SHLD), Macy’s and Penney’s are fighting to keep the doors open. The answer is by staying abreast of two seemingly disparate but interconnected trends in American life.

The first is upward mobility and the growth of America’s upper middle class and the wealthy. Data from Pew Research and Quartz indicates that America’s upper middle class grew from 11% of the population in 2001 to 12% in 2015. The highest percentile of earners grew even more expanding from 7% of the populace in 2001 to 9% in 2015.

This benefits Nordstrom because its customer base is growing. At the same time, the middle class Penney’s, Sears, and Macy’s customer base is shrinking. The middle class constituted 54% of America’s population in 2001 and 50% in 2015, according to Pew’s estimates.

America will soon no longer be a middle class nation which is good for Nordstrom. There are more Americans with the money to shop at Nordstrom than ever before.

Nordstrom is a Deep Discounter

The second trend Nordstrom capitalizes on is deep discounting which is driven by the anxieties left over from the Great Financial Meltdown of 2007–2008, and growing income inequality.

Bizarrely Nordstrom is a deep discounter, it just is not as public about it as TJX (NYSE: TJX) which operates TJ Maxx. Unlike TJX; which brazenly runs its stores like a giant bargain basement, Nordstrom is a quiet discounter.

Nordstrom discount outlets like Nordstrom Rack and Last Chance are hidden away in distant exurbs like Lombard, Illinois. Their advertising is limited, but The Chicago Tribune noted they attract legions of loyal customers with luxury goods at incredibly low prices. For example a $100 Ralph Lauren robe marked down to $15.

Last Chance has attracted a lot of local customers. Many Chicago residents are willing to drive 45 minutes to reach it, in Chicagoland traffic, The Tribune discovered.

This strategy allows Nordstrom to discount without having the lower middle class in its flagship stores. The strategy contrasts dramatically with TJX; which goes out of the way to locate its discount outlets in busy malls and downtown streets.

Nordstrom’s Clever Strategies for Attracting Customers

An interesting use of Nordstrom Rack is serving as a gateway to Nordstrom. Nordstrom Rack is the number one new source of new customers at Nordstrom, The Tribune noted.

The Rack serves this purpose by exposing newly affluent shoppers to Nordstrom outside of the main department stores. That way the newly-minted upper middle class do not have to feel guilty about shopping at Nordstrom, because the Rack is a discounter.

A similar strategy to attract upwardly-mobile millennials (shoppers under 35) is in play at Nordstrom Local. Nordstrom Local is a pickup point and service center for Nordstrom merchandise ordered online cleverly disguised as a day spa and coffee and wine bar that is being tested in Los Angeles.

Nordstrom’s Plan to Attract Millennial Shoppers

The idea behind Local is to attract hip younger shoppers that would not be caught dead in a department store or a mall. Local is opening up in hipster meccas like Los Angeles and New York where tech-wealthy Millennials and Generation Xers (those under 53) congregate.

Nordstrom Local even has wine and microbrews to help Generation X professionals relax after a hard day at the computer. A location in West Hollywood even features a lounge where Millennials can relax with the adult beverages.

The obvious clientele for Nordstrom Local is time-pressed working women, particularly mothers. Ladies that have to juggle career, kids, and family life, simply do not have the time to spend several hours a month at the mall. Yet, they are just as crazy about fashion as their mothers.

One way Nordstrom Local does that is offering personal shopping services for both men and women. The Trunk Club desk at Local has a professional shopper to help newly-affluent tech bros pick out some decent clothes. Style Board offers personal stylists to help nerds look chic.

Nordstrom Understands Changing Shopping Behavior

Unlike many of its competitors, Nordstrom is wise to the changing economy and shopping habits in today’s America. It is adapting to those changes in surprising ways.

In particular Nordstrom’s management has discerned two important behavior patterns among today’s Americans. Those patterns are:

· A growing portion of America’s population hates to shop and will go out of its way to avoid traditional brick and mortar stores.

· Time is now more important than price to a lot of today’s shoppers. Therefore, saving time is now important to many consumers than saving money.

Innovations like Nordstrom Local are designed to take advantage of those behaviors. Instead of trying to buck, or worse ignore, the trends Nordstrom is riding them. Nordstrom’s management understands changing shopper behavior and is capitalizing upon it.

Taking Nordstrom Beyond the Mall

A logical extension of this thinking would be to offer personalized same-day delivery from Nordstrom Local or department stores. One way to provide such a service would be a partnership with Amazon, Grubhub (NYSE: GRUB), Ocado (LON: OCDO), or InstaCart.

Other amenities to cater to the time-starved American would be pickup of Amazon or Walmart.com orders at Nordstrom Local. Offering pickup of Kroger (NYSE: KR) or Whole Foods grocery orders at Nordstrom Local, or electronics service at Nordstrom Local.

An intriguing idea that Nordstrom needs to explore is Nordstrom Local locations inside other retailers. Possible cohabitations for Nordstrom Local include; Costco Wholesale (NASDAQ: COST), Walmart (NYSE: WMT) supercenters, Whole Foods Markets, Target (NYSE: TGT), Sam’s Club, and Kroger Marketplace stores (supercenters).

One rationale for this strategy would be to help retailers avoid antitrust charges. Another is to reach all the younger shoppers who never go to the mall.

Is Nordstrom a Value Investment?

Okay, so Nordstrom is a good retailer that is doing some interesting things but is it a value investment? Investors will ask this question because Nordstrom is cheap; it was trading at $50.79 a share on 6 August 2018.

My answer is Nordstrom is a value investment for those willing to take a risk. Despite its success, Nordstrom reported a “Free Cash Flow” of -$157 million and an operating cash flow of -$28 million on May 5, 2018.

The company is in a dangerous position, and its resources are limited. Nordstrom had only $966 million in cash and equivalents on May 5, 2018. That indicates Nordstrom lacks the resources to successfully carry out ambitious experiments like local. The company also needs new sources of revenue, as the management clearly understands.

Still, Nordstrom is an experiment worth taking a chance upon because it is paying a pretty good dividend. Nordstrom investors received a 37¢ a share dividend on May 17, 2018. More importantly they have that 37¢ every quarter since February 2015.

Those looking for a low-priced retailer with good prospects and an interesting future should investigate Nordstrom. If any department store survives into the 21st Century it will probably be Nordstrom.

This story was first seen at the Market Mad House your daily rundown of retail and market insanity.

Written by

Daniel G. Jennings is a writer who lives and works in Colorado. He is a lifelong history buff who is fascinated by stocks, politics, and cryptocurrency.

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