Could Nordstrom Be the Next Best Buy?

The high-end retail segment did well throughout the recession, and continues to do well today. Nordstrom (NYSE: JWN  ) in particular has beaten the market by 12% since 2007. But another player recently entered the arena -- one that's up almost 500% in that same amount of time, and is known for taking over any industry it sets its sights on. I'm talking, of course, about Amazon.com (Nasdaq: AMZN  ) , but for once, I don't think its competitors have anything to worry about.

Another headline about the death of big-box stores
Most investors at this point are familiar with Best Buy's (NYSE: BBY  ) downward spiral. Once a leader in its industry, the company has struggled ever since Amazon started selling electronics, DVDs, and video games at much lower prices.

Best Buy's most recent quarterly filings reported $1.7 billion in losses, leading the company to close more than 50 stores and lay off nearly 400 employees. It seems to be following closely in the footsteps of its long-lost competitor, Circuit City.

The case for showrooming in the digital age has been made, and Amazon has absorbed most of the blame. But what's true for retail in electronics might not be true for high-end apparel.

Selling an experience
Taking into account things like customer service and the shopping environment, Nordstrom recently ranked No. 1 in the 2012 Luxury Consumer Experience Index survey conducted by New York's Luxury Institute. Customer loyalty was also through the roof, with 96% of shoppers saying they planned to shop there again, and 94% recommending the store to their family and close friends.

Milton Pedraza, CEO of the Luxury Institute, pointed out that "retailers, especially in luxury, are selling experiences to customers more than they are selling any particular good."

This is the one thing Amazon hasn't yet found a way to compete with. While shopping online is an enjoyable experience all its own, it isn't luxurious. It's quick and convenient, but you have to pour your own champagne, and the computer screen's glare is much less flattering than the fitting rooms' carefully chosen lighting.

Another thing Nordstrom has going for it is a better reputation with brand manufacturers. For example, Bonobos, currently the largest U.S. clothing e-tailer, recently signed a deal to sell its clothes with Nordstrom. In contrast, it chose not to sell its clothes through Amazon, because the look of the site doesn't match the experience it wants customers to associate with its clothing.

However, Best Buy's hands-on experience with the latest and greatest gadgets wasn't enough to beat out Amazon's pricing, so why would Nordstrom's fate be any different?

Because there is room for everybody here
Bottom line: Best Buy was about the products and Nordstrom is about the experience. And that experience has actually helped it succeed online as well. Nordstrom owns Hautelook.com, another flash-sale site; Nordstrom Rack, a discounted version of its namesake brand; and an extensive online store at Nordstrom.com, which offers free shipping as well as free returns, online or in store, no matter what.

These sites would seem to sneak up on Amazon's backyard, especially considering that Amazon owns Endless.com, a popular online shoe shop; Shopbop.com, a popular fashion apparel site selling designer brands; and MyHabit.com, a flash-sale apparel site, similar to Gilt. But Nordstrom still sees growth from its online site outpacing its namesake store.

All of this matters because both companies have been able to grow revenue simultaneously in this segment for years. There is plenty of room for all of the above.

And there will continue to be plenty of room for high-end fashion within both Amazon.com and Nordstrom because they will attract different types of loyal, and fashionable, customers -- those looking for convenience versus those looking for a luxurious experience.

Investing in retail the smart way
What matters most for investors, then, is simply choosing the type of company in this sector that they want to invest in. Amazon is a growth company with an eye toward the long term. This makes some investors uneasy, because Bezos is willing to sacrifice a lot for the end goal.

Alternately, if you take a look at the graph below, you can see that Nordstrom has been a more stable stock -- but one still offering growth and market-beating returns for its investors.

JWN Chart

JWN data by YCharts

The retail segment can be a tricky one to invest in. You want an Amazon, not a Best Buy, but making that distinction is easier said than done. Luckily for you, some of our top analysts think they've found it, and have outlined the retail superstar in a special free report. If you want to read everything you need to know about it in "The Motley Fool's Top Stock for 2012," then click here now.

Fool contributor Amanda Buchanan owns shares of Amazon.com, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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