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Belt-Tightening Begins at Nordstrom, Inc.

By Adam Levine-Weinberg – Jul 1, 2016 at 10:05AM

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The upscale chain is finally getting serious about cutting costs to preserve its profitability in the midst of a recent retail downturn.

Most U.S. department store chains have experienced a sales downturn in the past year or so. This certainly was the case for Macy's (M 0.98%) and Nordstrom (JWN 2.03%). Last quarter, comp sales declined 5.6% at Macy's, including both owned and licensed departments. Nordstrom's performance wasn't much better, with full-line comp sales down 5.4%.

Sales at Nordstrom's full-line stores have slowed dramatically in the past year. Image source: Nordstrom.

Macy's was fairly quick to start slashing costs after sales began to slow. By contrast, Nordstrom initially kept most of its plans intact. However, Nordstrom finally seems to have realized that it needs to get its costs under control to cope with the current retail downturn.

Macy's scales back spending

Last November, with sales trends showing no signs of bouncing back, Macy's announced that it would cut its selling, general, and administrative expenses by $500 million by 2018 relative to its previous plans. The company also stated that it would reduce capex to less than $1 billion in 2016 compared to about $1.2 billion in 2015.

At the same time, Macy's revealed plans to close 35 to 40 stores in early 2016. In January, Macy's released a list of 40 store closures. Of those, four had already closed in 2015 and the rest were shuttered a few months ago.

Macy's has also accelerated its cost cuts, so that it will achieve $400 million of expense savings in 2016 alone, with more reductions planned for the next few years.

These decisive cost-cutting actions stand in sharp contrast to Nordstrom's response to the sales slowdown last year. Nordstrom did trim its five-year capital plan modestly at the beginning of 2016, from $4.3 billion to $4.0 billion of total investment. It also laid off 120 tech workers in March. But these actions were fairly modest in scope relative to Macy's approach.

Nordstrom gets serious about costs

In the past three months or so, Nordstrom has become much more aggressive about cutting costs. In April, it announced plans to cut 350 to 400 jobs from the corporate office and regional support teams by mid-2016, as part of a change to its "operating model."

In May, Nordstrom gave the first indication that it might close some stores. President of Stores Jamie Nordstrom insisted that all of Nordstrom's stores were still profitable, but said that in some cases it might make sense to close a location -- for example, if its lease were expiring.

Last week, the company did announce a store closure. The Horton Plaza location in San Diego will close in late August after more than 30 years of operation. Nordstrom should be able to retain a lot of the sales from this store, as it has three other full-line stores in the San Diego area, one of which is just five miles from Horton Plaza. Meanwhile, it was able to sell the store building itself to the mall operator.

Additionally, Nordstrom recently delayed its plan to open a West Coast fulfillment center for its full-price e-commerce business. The company had been close to choosing a site earlier this year, ahead of a groundbreaking on the $170 million project in late 2016 or early 2017. Instead, it has postponed a decision indefinitely, saying that it doesn't expect to open another fulfillment center until after 2020.

Trunk Club will close its Chicago fulfillment center by next August. Image source: Nordstrom.

Finally, on Tuesday, Nordstrom stated that it would close its Trunk Club subsidiary's fulfillment center in Chicago by August 2017, eliminating 250 full-time and part-time jobs. Going forward, Trunk Club will utilize the regular Nordstrom fulfillment network.

By closing the Trunk Club fulfillment center -- and postponing construction of a West Coast fulfillment center -- Nordstrom will better utilize its existing fulfillment capacity. This will help the company to leverage its fixed costs, which is especially important now that its e-commerce growth has slowed in the past year.

Profit should stabilize later this year

Last quarter, Nordstrom's earnings per share plunged more than 50% year over year, and analysts expect another sharp EPS decline in Q2. However, the company's recently announced cost cuts should allow Nordstrom to stabilize its earnings later this year. (Easier comparisons and efforts to reinvigorate sales will also help.)

Nordstrom stock doesn't seem especially cheap right now at roughly 15 times its projected 2016 EPS. However, a more disciplined approach to cost management should allow the company to recover most of the margin deterioration it has experienced in the past few years, leading to a strong rebound in earnings over the next few years.

Adam Levine-Weinberg owns shares of Macy's and Nordstrom. The Motley Fool recommends Nordstrom. 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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Nordstrom Stock Quote
$22.13 (2.03%) $0.44
Macy's Stock Quote
$23.65 (0.98%) $0.23

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