Over the past five years, most department store chains have downsized substantially, reacting to falling mall traffic and the growth of e-commerce. Nordstrom (NYSE:JWN) has been one of the few exceptions. It has closed an average of two full-line stores a year recently, but it has also added a number of new ones, including expanding into Canada (with six full-line stores) and Puerto Rico (with one store). In total, Nordstrom's full-line square footage has increased modestly over the past five years.

Nordstrom's last two new full-line stores -- for the foreseeable future, anyway -- will open this fall: a Manhattan flagship location and a store in a new mall in Norwalk, Connecticut.

Meanwhile, Nordstrom has decided to start paring down its full-line store fleet more aggressively. Just in the past month, the upscale retailer has announced plans to close four more stores, with three of those store closures revealed last week.

Nordstrom bails out of underperforming markets

In recent years, Nordstrom has occasionally closed full-line stores: generally secondary locations in markets in which it could continue to serve customers in other full-line stores. As recently as last year, management noted that all of the company's stores were profitable. Furthermore, the presence of a full-line store can help spur online sales by making product discovery, returns, and alterations easier.

A rendering of a Nordstrom full-line store.

All of Nordstrom's stores are profitable. Image source: Nordstrom.

However, many Nordstrom stores are no longer generating enough sales and profit to justify further investment, as retail analyst Neil Saunders recently told The Seattle Times. That means a growing number of locations are falling short of the brand's lofty standards.

As a result, Nordstrom has finally begun to close stores at a faster pace this year. Some of these have been locations near other full-line stores that will remain open. But in a handful of markets, Nordstrom has decided to close its only full-line store.

In early January, Nordstrom closed its full-line store in Providence, Rhode Island. Three months later, it closed full-line locations in Wellington, Florida, and Norfolk, Virginia. While there are two other Nordstroms within 25 miles of the Wellington store, customers in Providence would have to drive 40 miles to the nearest full-line store -- and those in Norfolk would have to trek more than 100 miles to the Richmond suburbs.

Four more store closures on the way

With three full-line Nordstrom stores having closed by early April, 2019 was already a relatively big year for closures (by Nordstrom standards) before the month of June. However, last month, the company announced that four more stores will close in the coming months.

In early June, Nordstrom confirmed that it will close its full-line store at Northgate Mall in its hometown of Seattle in August. This closure was expected, as mall owner Simon Property Group is about to begin a massive redevelopment of that mall. Nordstrom's flagship store in downtown Seattle is just seven miles away.

The exterior of a Nordstrom Rack store, with a Nordstrom full-line store in the background.

Nordstrom's flagship store will soon be its only full-line location in the city of Seattle. Image source: Nordstrom.

Nordstrom announced three more store closures last week, all of which will be implemented in mid-September. In San Francisco, the company will close its full-line store at Stonestown Galleria. Like the Northgate store closure, this move was widely rumored in advance. Nordstrom has a flagship store at Westfield San Francisco Centre, less than 10 miles away.

The company also decided to close its store at The Mall at Partridge Creek in Clinton Township, Michigan. Nordstrom operates a full-line store at The Somerset Collection -- the top-performing mall in the Detroit metro area -- less than 20 miles away. Finally, Nordstrom will shutter its only full-line store in Alaska, which is located in downtown Anchorage.

Why it makes sense to close profitable stores

It might seem odd for Nordstrom to close stores that are still profitable. However, the retailer has multiple full-line locations in markets like Seattle, San Francisco, and Detroit. When it closes a store that isn't performing well, Nordstrom can recapture a sizable proportion of that location's sales in nearby stores that offer a better customer experience, as well as online.

Even in markets where Nordstrom doesn't have other full-line stores nearby, closing profitable stores can make sense. The stores have to carry inventory, tying up working capital. Moreover, if the inventory doesn't sell well, Nordstrom could be forced to offload it at a discount. Additionally, most of the company's full-line stores are owned or ground-leased, and Nordstrom typically can cash in on the real estate after closing a store.

Importantly, Nordstrom has a strong e-commerce business, giving it a good chance to retain some business even in markets where it closes its only full-line store. Last year, digital sales accounted for 30% of the company's total sales, and that percentage has been rising quickly.

Nordstrom finally seems to have recognized that low-performing stores are only going to get worse over time. By transitioning to a smaller full-line store portfolio centered on the most productive locations, Nordstrom should be able to deliver better financial results in the long run.

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