Costco (COST -0.24%) and Nordstrom (JWN 0.96%) are two retailers that had different performances this year. Costco benefited from staying open and from shoppers stocking up on groceries and essentials during the beginning of the COVID-19 pandemic. Nordstrom saw sales plummet when non-essential businesses had to close due to restrictions around the virus, but its e-commerce business saw rapid growth.
Both consumer discretionary companies are known for their customer service and have taken steps to position their business in the current environment, but which retailer is the better investment?
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Costco
Costco, the operator of global warehouse membership clubs, performed well this year, as consumers stocked up on extra groceries and household goods during various phases of lockdowns. Its business has been resilient in 2020, as many other retailers saw their revenue and foot traffic hurt by store closures and restrictions.
While many retailers had sharp sales declines in the second and third quarters this year, the company's net sales rose nearly 17% on a year-on-year basis in its fiscal first quarter of 2021 that ended on Nov. 22. The previous quarters, too, witnessed growing headline numbers. The fiscal fourth quarter of 2020 (ended Aug. 30), for example, saw revenue rise by 12.5%, while the third and second quarters witnessed 7.3% and 10.5% sales growth, respectively. In short, business grew every quarter this year, versus 2019.
The warehouse retailer has a growth opportunity over the medium and long term with its e-commerce business. In March, Costco acquired third-party delivery and logistics company Innovel Solutions, which offers "final-mile" delivery services with installation and "white glove services." Innovel's network spans nearly 90% of the U.S. Costco sees Innovel helping it grow its e-commerce sales of large items like furniture, televisions, and fitness equipment.
Another promising area of growth for e-commerce is the grocery business. Costco saw online grocery spike up during the fourth quarter. Fourth-quarter comparable e-commerce sales rose by 90.6%, up from the third quarter's 64.5% increase. A study by research company C+R Research found that 69% of those surveyed used grocery delivery or pick-up for the first time during the COVID-19 pandemic. This shift in consumer behavior may be sticky even after the pandemic goes away, as market researcher Escalent found that 38% of those surveyed plan to keep their current levels of online grocery shopping after COVID-19.
Costco CFO Richard Galanti spoke about where he sees opportunity for e-commerce on the fourth-quarter earnings call: "We were pleasantly surprised by just the sheer increase in people using same-day fresh. Anecdotally, I can't tell you how many people have mentioned to me how they love it and they may very well be shopping same-day fresh from their local supermarket as well."
Costco's customer loyalty and membership revenue provides stability. Customer loyalty continues to be extremely strong and hasn't been impacted by consumer behavior shifts this year. Membership rates in the U.S. and Canada in the fourth quarter stayed steady at 91% and worldwide at 88.4% compared to the prior quarter. Even after a return to normalcy, Costco will likely remain a stalwart retailer with stable revenue drivers and room for expansion.
Nordstrom
Like many retailers, Nordstrom had a tough 2020, with forced store closures and falling sales throughout parts of the year. During its second quarter (ended Aug. 1), revenue declined 53% year over year, as stores closed for about half the quarter due to COVID-19 restrictions. The consumer discretionary company is also being impacted by shopping increasingly shifting online and malls losing foot traffic.
About 30% of all Nordstrom stores are housed in shopping malls, which have seen an ongoing decline in foot traffic. Nordstrom has about 95% of 110 Nordstrom FLS (full line stores) in malls. Malls were already struggling before COVID-19, but the virus has sped up the declines in foot traffic. Research firm Coresight Research projects that about 25% of America's malls could close within the next three to five years. CoStar Group estimates that mall occupancy rates hit the lowest level in a decade in the second quarter of 2020 at 94.4%.
Consumers are increasingly turning to e-commerce, particularly amid store restrictions and social distancing. Nordstrom's e-commerce business has been strong, with digital sales reaching 54% of total sales in the third quarter (ended Oct. 31), up from 34% a year ago. The retailer is having success in this space, which is also drawing new customers to Nordstrom. "We've had a much higher rate of customer acquisition, new customers that we just haven't had before," said CEO Erik Nordstrom on the third-quarter earnings call.
While Nordstrom has had success with e-commerce and decreasing expenses, there may be more challenges around revenue growth. Recent economic data show a slowdown in the recovery from the COVID-19-related recession. U.S. retail sales declined for two months in a row in November. Nonfarm payrolls also came in below expectations for November. Given the financial and economic uncertainty, people may favor value-focused retailers over luxury stores like Nordstrom.
While there is promise from a return to normalcy with vaccines and treatments for COVID-19 that may boost Nordstrom's business, there remains plenty of competition in the retail space from e-commerce-focused retailers and discount stores like The TJX Companies' T.J. Maxx. Plus, it's unlikely that mall traffic will return to growth even after the virus concerns subside.
The winner
Costco is the better bet in the current environment, given its loyal customer base, expansion opportunity with e-commerce, and its appeal during times of economic uncertainty. While Nordstrom has potential upside when the virus is over and people can shop freely again, it still faces the secular decline of malls in the U.S., where many of its stores are housed.
