How Nordstrom Can Stop the Bleeding

The past week has not been kind to retail stocks. A seemingly endless parade of missed expectations was capped off after the market closed Thursday when Nordstrom Inc. (NYSE: JWN) reported a same-store sales decline of 7.7% and an earnings per share (EPS) drop of nearly 61%.

Nordstrom has not reported a same-store sales decline since the third quarter of 2009. And it is pretty safe to say that no analysts were looking for an EPS decline of that magnitude.

The company blamed the sales decline on less traffic and increased promotional activities, and on the conference call Thursday evening, co-president Blake Nordstrom said that company recognizes “that the pace of change is increasing.” That’s a start, but it might have been better to recognize that several years ago.

Is the retail sector, and especially its big department store chains, going to follow other sectors (newspapers and the music business leap to mind) into a descending spiral that won’t end until the old players learn to play by a new set of rules and settle for a changed market with lower margins?

In a nutshell, brick-and-mortar retailers are all competing against Amazon.com Inc. (NASDAQ: AMZN), and first recognizing that and then adapting their business models to deal with it are the keys to long-term survival.
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Eric Nordstrom, one of three co-presidents with the last name of Nordstrom, identified Nordstrom’s three-pronged problem during the conference:

There’s a lot of excess product in the marketplace. It’s certainly easy to shop online. There’s some heavy discounting going on.

For Nordstrom the combined Rack stores and online store sales growth has slowed and is projected to keep slowing down. Combined sales from these sources now accounts for about 30% of Nordstrom’s total sales, and a projection calls for that to grow to 35% by 2020. But shifting sales to the off-price Rack and online stores may only result in a bigger piece of a smaller pie.

Nordstrom has to make the pie bigger, and discount sales won’t do that. The most serious problem Nordstrom, Macy’s, Kohl’s, J.C. Penney and other chain stores face is falling traffic to the stores. Luring customers to the stores with promotional prices is not a long-term solution. Trying to drive customers to their online stores just drives consumers to compare prices with Amazon, and that’s a comparison that the brick-and-mortar retailers can rarely win.

As in the music business where overpriced CDs first gave way to digital singles sales (think iPods and iTunes 10 years ago) and later to on-demand streaming (think Spotify and Apple Music), old-line retailers have to wring out costs in their brick-and-mortar stores first and, then, learn to live in a new world of lower margins where online sales rule. This will certainly not be either easy or painless.

Nordstrom’s stock traded down nearly 14% Friday morning at around $38.99, after posting a second consecutive 52-week low of $37.99. The stock’s 52-week high is $80.23 and the consensus price target before the report was $51.96.