The retail apocalypse is devastating department stores and other retailers across the country. In 2019, there were more than 9,300 store closures in the U.S. To survive, a company must make strategic changes to adjust to the environment, or else risk declining revenue, store closures, and maybe even bankruptcy.
Fortunately for its investors, Nordstrom (JWN +0.00%) is in a relatively stable position, given the difficult circumstances. Here's a look at two things it's doing well to counter the headwinds plaguing the industry.
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1. Emphasizing its off-price stores
Part of the demand in off-price shopping comes from the treasure hunt experience: Customers are looking for that new piece that just arrived at the store and won't be there for long. Nordstrom is putting itself in a position to deliver that experience by developing the capability to be opportunistic buyers when off-price merchandise becomes available. That way, its product mix is frequently changing with fresh looks to attract shoppers.
Management has been focusing new store openings on its off-price Nordstrom Rack locations. The third-quarter earnings report in November showed that the company had closed six full-line stores and opened five off-price locations. While full-line stores saw sales decrease 4.1% in the third quarter, its off-price stores experienced a 1.2% gain. Its ratio of off-price stores to full-line stores has also increased with 243 to 110 locations, respectively.
2. Competitive fulfillment options
Nordstrom offers free shipping on every order, no minimum required, while Macy's requires a $25 minimum for free shipping and J.C. Penney $99. Free shipping on any order also puts Nordstrom ahead of Amazon.com, which only offers free shipping across the board to its Prime members, who must pay a membership fee (while also enjoying a host of other benefits). With consumers shopping more and more online, this gives Nordstrom a competitive edge.
As with many retailers, buy online, pick up in store (or BOPIS) is Nordstrom's most profitable transaction. That's why it was encouraging to see that half of digital sales growth came from order pickup in the third quarter. And it was even higher in the Los Angeles market, which is its biggest. Shoppers are increasingly demanding more convenience, and the standard for customer convenience in order pickup has been set by Target, which is the level Nordstrom should aim for.
Its Market Strategy initiative is working well. Since scaling the strategy in Los Angeles, third-quarter sales have outpaced its other markets by one percentage point. It now wants to expand the plan to the rest of its top 10 markets by the end of 2020. The initiative aims to give customers a greater selection available for next-day pickup or delivery without increasing inventory levels, and to offer express services such as order pickup, returns, and alterations at additional locations.
What does this mean for investors?
Nordstrom has been investing heavily in its business for several years now to deal with the changing retail environment. Now that the generational investment cycle is behind it, management expects capital expenditures to drop to 3% to 4% of sales beginning this year, down from 6% of sales in 2019. With lower capital expenditures, investors can expect higher free cash flow in 2020.
Its competitive fulfillment options, off-price offerings, and increasing customer conveniences will position it favorably to survive the retail apocalypse. The future for large department stores is not bright, but Nordstrom is one consumer-discretionary stock that should outperform others in its field.
