Nordstrom’s in big trouble as full-line stores report fifth straight quarter of declines
It was only a matter of time before the holy grail of retail, Nordstrom’s felt the pinch of the consumer pullback.
According to this Houston Chronicle report Nordstrom’s full-line stores, usually the anchor store at your mall has recorded its fifth straight quarters of year-over-year declines.
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 brick-and-mortar retailers these days, with department stores hit particularly hard.
While Nordstrom’s total sales 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 that bring the bulk of Nordstrom’s business and have shaped its reputation for stellar customer service — have logged five straight 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.
For the latest nine months reported, Nordstrom saw its profit fall nearly 64 percent, to $153 million.
There are several reasons for the gulf between top-line and bottom-line results during those months.
The company’s $197 million write-down last quarter for its $350 million purchase of online retailer Trunk Club in 2014 was a hit to its bottom line. Without that write-down, Nordstrom would have logged a profit, 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 Nordstrom.com, Nordstromrack.com and flash-site 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 percent 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 fulfillment 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 e-commerce 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 percent of its workforce, and laid off 120 tech staffers. Last spring, executives also said they were looking at more cuts in the company’s already-trimmed $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 hometown neighbor Amazon, which is already the country’s biggest seller of clothes online and is likely to overtake Macy’s this year as the nation’s overall biggest seller of apparel, 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.