Nordstrom's Canadian Expansion Is a Huge Opportunity

Upscale department store operator Nordstrom (NYSE: JWN  ) has been running out of room to expand in the U.S. With 117 full-line stores spread across 35 states, Nordstrom already has a presence in most of the country's wealthy metropolitan areas. The company has a few new stores in the works, including its first Manhattan flagship, but Nordstrom has mostly looked to its Rack discount division for growth.

However, this year Nordstrom will begin its first-ever international expansion by entering the Canadian market. Nordstrom already has firm plans for six stores in Canada, with the possibility of adding a few more over time.

While Target (NYSE: TGT  ) has struggled with its own recent expansion into Canada, Nordstrom has much better prospects for success. Nordstrom has a great starting real estate footprint, a strong track record of quality and great service, and a business model that is more suited to building a new market from scratch.

The Canada plan
Nordstrom first announced its plans to open stores in Canada in September 2012. At that time, the company planned to open four locations, in Calgary, Vancouver, Ottawa, and Toronto. Three of those locations are former Sears Canada stores where mall owner Cadillac Fairview bought out the remaining lease terms. The timing of Nordstrom's move into Canada was driven by so much high-quality real estate coming onto the market at once.

The Calgary store is scheduled to open this September, with the Vancouver and Ottawa locations following in 2015. Since the initial announcement in 2012, Nordstrom has added plans for two more stores in the Toronto area, including a downtown store at Toronto's Eaton Centre announced just last week. All three Toronto stores are scheduled to open in 2016.

A big opportunity
Nordstrom's Canadian stores will make a significant contribution to the company's growth over the next several years. With sizes ranging from 138,000 square feet to 230,000 square feet, the Canadian locations will be larger than a typical Nordstrom store.

Moreover, Nordstrom has managed to lock down some of the most valuable real estate in Canada for its first six stores. Every single one of these stores will be located in one of the top 11 malls in North America in terms of sales productivity (sales per square foot)! This means that these malls have a lot of foot traffic and their patrons have plenty of money to spend.

For this reason, Nordstrom's entry into Canada is likely to be much smoother than Target's recent push into Canada. Target opened more than 100 stores in Canada last year, but after an initial surge in consumer interest, Target had trouble driving repeat traffic.

Target has a tough hill to climb, because its business model depends on getting customers to change their weekly shopping habits. Target needs people to come to its stores for everyday necessities and then (hopefully) make some impulse purchases while they are there. By contrast, Nordstrom is in better shape as a destination store. It can capitalize on the strong existing mall traffic; all it needs to do is convince shoppers who are walking by to come into the store.

Foolish wrap
As Nordstrom gets started in Canada, there will inevitably be one-time costs that prevent it from reaching profitability immediately. For example, Nordstrom recently began a hiring push for its Calgary store. It plans to hire 30 managers more than six months in advance of the store opening, so that it can bring them to Seattle for an intensive training program.

However, by the end of 2016, when the first batch of six stores will be open, Nordstrom should be on a path to strong profitability in Canada. With locations in six of the best malls in North America, Nordstrom will have a steady stream of potential customers walking by its new stores. Its fashionable offerings and legendary service should do the rest of the work.

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