Now that the holiday shopping season has passed, Nordstrom (JWN 5.55%) is once again in a position in which it could resume its efforts to go private. However, the many obstacles that stood in its path before it paused its plan late last year remain in place.
Because the retailer preannounced its holiday results, something it rarely does, it seems likely it's renewing its search for a way to get out of the public spotlight. CNBC cited sources knowledgeable of the controlling family's intentions who said that was the game plan. Yet financing remains a problem, and though Nordstrom turned in healthy holiday results, it wasn't able to outrun the wreckage of the retail landscape.
Between rack and ruin
Often companies go private because they believe they have a better chance of doing the things necessary to turn around the business than if they remained public. For example, Nordstrom may want to calve off its discount chain Nordstrom Rack.
It has effectively navigated the off-price trend better than most retailers like Macy's (M 5.40%) and Kohl's (KSS 9.05%) that got a late start on the phenomenon, and Rack has actually become the largest of the company's segments, larger even than its namesake stores. The discount chain is also more successful. Last quarter net sales at Nordstrom fell 1.2% and comparable sales were down 1.9%, but Rack reported a 5.5% increase in net sales and comps that were almost 1% higher.
Spinning off Nordstrom Rack would be a way to extract the value of the brand that is now buried under its sagging parent's hardships. But because the off-price chain might be more valuable than the rest of the business, shedding it might be a more difficult task to pull off as a public company. Going private would allow Nordstrom to do the restructuring it needs while also giving shareholders the return they've been looking for.
Unfortunately, the hurdles are high for Nordstrom to go private, too. The number of bankruptcies in retail, the diminished outlook for mall operators, and the rising cost of financing a deal make it difficult to pull off.
Nordstrom had partnered with private equity firm Leonard Green & Partners as a first step in locating financing. Some $8 billion might be needed to allow the retailer to go private, and finding that kind of money in the current environment will almost certainly be a challenge.
Although the strong holiday season gave many retailers a reprieve, they're by no means out of the woods, Nordstrom included. It reported net sales for the November-December period rose 2.5%, with comps rising 1.2% higher. It was a good showing, but by no means great, though Rack once again far outpaced the headline brand. Rack's net sales were up 8.2% while comps jumped 2.9% from the year-ago period.
A difficult row to hoe
Despite its recent troubles, Nordstrom remains a far more financially stable company than others. It has a loyal customer base, it's still renowned for its customer service, and it continues to report steady online growth. In the third quarter, sales were 14% higher at its Nordstrom digital channel and up 26% at its discount brands.
And while it has experimented with new concepts, it's had some unsuccessful projects, such as Trunk Club, or odd ideas, like its new Local store that sells just about everything but clothes.
Shares of Nordstrom have jumped 30% higher from their November low and still trade at reasonable valuations given that the company is arguably among the best in its industry, despite having gone through a series of failures.
Investors might win regardless of whether Nordstrom goes private or not. It could come through this rough patch, able to execute a turnaround without having to take drastic measures, or even engineer a transaction that ultimately pays shareholders a hefty premium. At this time, the latter course seems more difficult than the former.