2 Theories for Why Nordstrom May Go Private

Does the Norstrom family want to invest more aggressively in growth initiatives, or does it just want to buy the company while share prices are down?

Motley Fool Staff
Motley Fool Staff
Jun 25, 2017 at 6:20PM
Consumer Goods

Nordstrom (NYSE:JWN) shares have been pummeled since peaking at more than $80 in early 2015. In the past two years, sales growth has slowed and profit margins have come under pressure, causing investors to lose confidence in the company's ongoing strategy.

In this segment from Industry Focus: Consumer Goods, Vincent Shen recruits senior Fool.com contributor Adam Levine-Weinberg to discuss two potential reasons why the Nordstrom family is thinking about taking the company private. One possibility is that the family wants to be free of Wall Street's short-sightedness in order to make long-term investments to drive future growth. But it's also possible that they simply see an opportunity to profit by buying the rest of the company, while the stock is cheap.

A full transcript follows the video.

This video was recorded on June 20, 2017.

Vincent Shen: I'd like to talk about, if the Nordstrom family is able to successfully make this deal happen, and the story essentially ends for shareholders, what will the priorities then going forward be for the management team, once they're free from Wall Street's more short-sighted view, in terms of quarterly results. What do you think some of the opportunities are beyond that?

Adam Levine-Weinberg: There's basically two theories about what the Nordstrom family wants here. The first theory is, what the family really wants to do is make the business great and continue to invest heavily. As a result, they need to be private in order to have the flexibility to not have to make their numbers every quarter, to make these really long-term bets, invest a lot of money, maybe that means renovating stores, in some cases building new stores. A lot of it would be creating new online tools, a better mobile site, different ways that you could build up the company's e-commerce capabilities and figure out new experiences to bring into its stores to drive a rebound in store traffic. The advantage of that is if you could return the company to the faster growth trajectory, recently it's been low single digits but if you get it back to high single digits where it was a few years ago, the company would potentially be worth a lot more. The downside is that it's not clear that anything the company could do would really get people going back to malls. It's just that the consumer shopping trends have gotten so far against malls right now that until you have a big shake out in that mall sector, where a lot of the lower performing malls close entirely, it's not clear that you're going to be able to get more malls. There's too many malls competing for the amount of traffic that exists, so getting more people into a particular store is a really tough hurdle right now. The other issue is, if you invest all this money, then in a downturn, where are you going to come up with more capital? You've already taken on more debt, that's going to increase your interest expense. And while getting out of the limelight does give you some flexibility, you still have to pay the bills, so it only gives you a certain amount of flexibility to invest more heavily. 

The other second theory on what they're doing is, they're just trying to buy the business cheap, and it's that they have a long-term perspective that the company is worth a lot more than what it's trading for right now. And if they can buy the whole thing for say, $50 to $55 a share, they're going to do that and wait for these investments they've made to pay off. To give some examples, they've made a big move into Canada. As of three years ago, they didn't have any stores in Canada. They now have five. They're opening a sixth this fall. Then, they're going to start opening several Nordstrom Rack off price stores in Canada beginning next year. Up until now, they've been losing money in Canada, because these stores are very new, people are still getting acquainted with the Nordstrom brand, and they've had lots of pre-open expenses as they hire staff in advance before they open stores. Once you get open for a couple of years, then you can start making some money. So those stores that are right now losing money, hopefully in two or three years they become quite profitable for Nordstrom. They're also opening a big flagship store in Manhattan. They don't have any stores in New York City right now, so that's a really big opportunity for them. They're opening a smaller men's store in the spring next year, and then the really big store is going to be a full line store on 57th Street in Manhattan. That opens hopefully in the fall of 2019, assuming there aren't any further construction delays. That could be a store that generates $300 million or something of annual revenue, which is more than 2% of the company's sales from last year, so it's a really significant development. In the past few years, that's been just cost and no revenue. So once that store opens, if it's as successful as the company expects, that could be a significant driver of revenue, earnings, cash flow going forward.

Some other things they've been doing -- expanding the Nordstrom Rack, building out their e-commerce capabilities. All of these things have lots of long-term potential. They just haven't really contributed yet to the bottom line in the way that the company expects for the long-term. So the management team may just be thinking, "We're going to take on this debt, buy the rest of the company, wait five years, continue with our current plans but not increase our current investment, just stay with our current plan. And in five years, the company will be making higher revenue, earnings, cash flow. And once investors see that the business is stable, maybe we can sell it for a higher multiple than what we bought it for and make a lot of money in the process." So, I think there's two different perspectives on what the Nordstrom family could be doing. But I don't see the company getting really aggressive on investment. It's too risky to take on a lot of debt, and then also further reduce your cash flow by ramping up your capex at the same time. I think the company's made the investments that it needs, for the most part. They just want the flexibility to continue with the current rates, rather than having to focus just on making a lot of money right now to satisfy Wall Street.