Nordstrom Vs. Macy's: Round 1 Goes to Nordstrom

With the results in for the major department stores, Nordstrom (NYSE: JWN  ) clearly looks like it has beaten its rival Macy's (NYSE: M  ) this quarter. While Macy's announced that its comps fell 0.8% in overall terms, Nordstrom surpassed its peer with a 3.9% overall gain.

Macy's blamed the weather, but that isn't the only explanation for this variation in performance. Nordstrom is using a strategy that has worked very effectively for the discount retailer TJX (NYSE: TJX  ) and may have even beaten this discounter at its own game this quarter.

The effect of the weather
Macy's explained that the weather hurt its sales throughout most of the quarter, but conditions did improve near its end. CEO Terry Lundgren said, "Overall, business trends were soft in January through March, with the exception of the Valentine's Day shopping period. The trend improved in April when the weather began to turn in northern climate zones."

To see how well this argument holds up, a glance at Nordstrom's press release could be helpful. In reference to its full-line department stores, Nordstrom pointed out that its stores in Southern California and the Southwest posted the best results.

The statement from Nordstrom indicates that Macy's has a valid excuse this quarter, and so do other retailers that have complained about the weather. Of course, this also means that Macy's has higher expectations to meet for the rest of 2014 -- the department store left its full-year guidance unchanged though, which indicates that it's still confident about upcoming quarters. A more detailed comparison, however, shows that Macy's full-line stores actually didn't do all that badly in comparison with those of Nordstrom.

Direct sales and Rack stores drove Nordstrom's results
The main Nordstrom stores actually posted a same-store sales decline of 1.9%, worse than Macy's overall figure. However, the department-store chain still had a very good quarter on the strength of its direct sales and Rack stores. Direct sales rose 33% as shoppers bought products online instead of shopping in-store and with this included Nordstrom's comps rose 3.3% for the quarter.

In addition, Nordstrom's Rack concept posted a very strong comps gain of 6.4% while the department store continued to rapidly expand the footprint of this concept. It added 10 more Rack stores in the first quarter and plans to add 17 more this year. Nordstrom has some good reasons to expand the Rack concept aggressively.

Why the Rack works
Even with the global economic crisis in the past, shoppers still remain wary about spending too much money, especially on clothing. At the same time, they still want to look good and wear popular brands. Nordstrom Rack, TJ Maxx, and Ross all offer shoppers opportunities to wear clothing that they normally couldn't afford.

In addition, these stores also benefit from the very powerful variable-reinforcement model. You never know what you'll find in their bargain bins, which gives these stores a treasure-hunt appeal. If you don't pick up clothing when you see it, it might not be there the next week -- this encourages repeat sales. This strategy has worked great for TJ Maxx in the past, but this quarter didn't go very well for the discounter and its parent TJX.

The results from TJX
Shares of TJX dropped 7.6% during market hours on May 20 as the discounter missed on the bottom line. TJX posted earnings per share of $0.64 which missed the consensus of $0.67. The retailer also posted overall comps growth of 1%, while comps for its Marmaxx segment (which includes TJ Maxx and Marshall's) came in flat for the quarter. CEO Carol Meyrowitz explained, "While sales were not as strong as we would have liked, predominantly in our apparel business, I was very pleased that overall business trends improved as the quarter progressed."

TJX didn't blame the weather directly here, but the pickup in sales does suggest that it could have been a factor. The interesting thing here is the CEO's statement about apparel, as the Rack stores sold a lot more clothing this quarter. Did Nordstrom's Rack stores attract customers away from TJ Maxx stores?

The Rack goes online
News from Nordstrom's earnings call suggests that the Rack stores could soon become a much bigger threat to TJ Maxx and Macy's. Nordstrom has taken its treasure-hunt concept online. On the earnings call, President Blake Nordstrom discussed some of the features of Nordstrom's new Rack site:

It includes one of the largest merchandise offerings in the online off-price segment that encourages shopping, a limited time flash event side-by-side with a persistent selection of off-price product. It allows merchandise to be shipped faster than most off-price competitors enabled by our new fulfillment center shared by Rack and HauteLook.

Again, it looks like Nordstrom's covered all of the bases here. Like the regular Rack stores, customers can expect that the site will have basic clothing they need, but other bargains will quickly disappear if shoppers don't buy them immediately. Nordstrom's also ready to ship out the clothing quickly.

Foolish takeaway
Nordstrom's earnings call clearly shows how this department store is beating its peers and why this is set to continue. Nordstrom is on-trend in two very important ways with its off-price stores and its effective direct sales operation. Now it has combined these factors with its Nordstrom Rack site so it can bring in customers through mobile devices as well. Without the winter weather in play and with the new online operation set up, Nordstrom could go on to post even stronger results in upcoming quarters.

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