Nordstrom’s Full Closet Makes the Retailer a Fashionable Investment

Although Nordstrom had a lackluster 2013, the company's heavy investments in novel online strategies will help it grow its sales in 2014 and beyond.

Jan 7, 2014 at 11:01AM

Nordstrom (NYSE:JWN) had a rather patchy record during 2013 and seemed to sit on the sidelines while many of its retail counterparts roared. Nordstrom's shares managed to gain just 13% during the year, which, for investors, was as disappointing as coming home with empty bags after a shopping spree.

Total company net-sales growth was OK, but nothing to write home about -- the haute couture retailer only managed 4.7% overall sales growth for the year. Earnings for the year (excluding fourth-quarter earnings) also grew modestly by 8.3% to $2.35 per share.

Its luxury-goods peers recorded mixed results, with Michael Kors (NYSE:KORS) gaining 55% during the year, but Coach (NYSE:COH) tanking 3.5%.

Nordstrom also recently low-balled the top end of its full-year sales growth forecast, from 3% to 2.5%. But is it all doom and gloom at Nordstrom? Not by a long shot. There are solid reasons to believe the retailer will finally pull itself together and meet investor expectations in 2014.

Retail is a lucrative investment
2013 was a good year for many big retailers, with some stocks such as Best Buy clocking huge gains in excess of 245%, the best gain in the S&P 500 index. Retail stocks in general outperformed tech stocks and the broader S&P 500. The SPDR S&P Retail ETF gained 41.3%, while the Market Vectors Retail ETF rose 38.6%. Meanwhile, the Nasdaq Composite, home to tech stocks, was up 33.9% during the year, while the S&P 500 moved ahead 26.5%.

Despite a rather lackluster year, Nordstrom investors should avoid rushing into judgment. Recent strong results from The Gap and Macy's seem to suggest that consumer spending is nowhere near as anemic as Wall Street feared. Moreover, Nordstrom's more affluent consumers are less likely to be fazed by the widespread trend of bargain hunting in retail stores.

New initiatives
Nordstrom has been busy investing in initiatives that should support sales growth in the near future. The company is opening 24 new off-price Rack locations in 2014 and is also looking to spend on improving its best in class e-commerce platforms, including its flash-sale site Haute Look.

Nordstrom sales will also likely receive a significant lift from the company's revamped women's apparel division, which aims to pull younger and more hip shoppers into its stores. The company's tie up with trendy U.K.-based retailer TopShop, which has established shops-within-shops in 41 Nordstrom stores across the country, should help.

Rack website
Nordstrom is currently gearing up for even greater growth. The specialty retailer is ramping up a multichannel marketing approach by opening a new website entirely dedicated to The Rack. The Nordstrom store portfolio currently consists of 117 department stores and 141 Rack stores. The company plans to grow its Rack stores to at least 230 by the end of fiscal 2016. Rack stores have high profitability-- they average $525 per square foot, considerably more than Nordstrom's full-line stores, which currently chalk up about $415 per square foot. In comparison, the industry average is just $300 per square foot.

This is a very positive move by the company, especially when you consider that L2 Digital Think Tank ranked Nordstrom alongside Saks as the most digitally adept luxury retailers in the country. With the current trend of falling department store sales across the country, the clarion call for retailers to enhance their digital presence is more urgent than ever. Luckily for Nordstrom and its investors, the specialty retailer is already on a solid footing as far as online selling is concerned. 

Haute Look is hugely popular with customers
Nordstrom bought Haute Look, an Internet fashion company, back in 2011. Haute Look has been finding great acceptance with Nordstrom customers. The outfit now has a cool 15 million members -- three times as many as it had at the time of its acquisition. The wildly popular e-commerce platform teams up with The Rack and allows customers who are not satisfied with their Internet purchases to return their merchandise to Rack stores. This is a brilliant move by Nordstrom since customers who visit its physical stores are very likely to find a better replacement for their returned products, and may even end up making more purchases.

Nordstrom has placed a huge emphasis on its online stores as very close-knit partnerships with its physical stores and views them as a 'multichannel' approach instead of an alternative 'omnichannel' one, as competitors Macy's and Saks do. Nordstrom has taken this partnership concept even further to its other online stores including Bonobos, the online men's fashion outfitter, Jeffrey, and Peek, an online children's apparel retailer.

Nordstrom's multichannel approach has many attractive and innovative perks, including buying online then picking up at physical stores, free shipping and returns, and private sales for its e-commerce customers. The company has a fulfillment center for Internet purchases, with some fulfillment orders done right on the selling floor to ensure customers get their merchandise quickly. The company's multichannel selling approach that seamlessly integrates its online and physical stores will help it continue growing its sales, even as physical stores' sales continue to decline for many large retailers.

The bottom line
According to RBC Capital Markets, Nordstrom plans to spend $3.7 billion over the next five years, 61% more than it did in the last five years. That kind of spending can cause jitters among investors, since the company will be entering unchartered waters by spending a huge proportion of this in new ventures that are harder to model. But Nordstrom has a history of spending wisely, and hopefully investors will keep it in their portfolios.

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Fool contributor Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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