Macy's (NYSE:M) has arguably emerged as the winner in the mid-tier department store space. The iconic retailer has demonstrated an ability to resonate with the consumer and offer the brands they want at reasonable prices.
Nordstrom (NYSE:JWN) is a leader in the higher-end department store space and is, like Macy's, a standout in retail. However, Nordstrom is set to embark on a lengthy investment period to grow its business, which makes an investment in Macy's over Nordstrom an easier decision.
Head to head battle
The retail sector has been taken over by consumers who not only expect, but demand, a deal, coupon, or promotion every time they shop. There is no reason to believe this trend will end any time soon.
Macy's is already positioned as a promotional retailer and does not need to shift its strategy to accommodate the current environment. In fact, Macy's is known for its big sales, advertised directly on its website.
While Nordstrom's client base are somewhat more affluent than the typical Macy's shopper, it's safe to assume there are overlaps. Nordstrom's management team has previously admitted it needs to rethink its promotional stance in the current environment. During Nordstrom's first-quarter conference call back on May 15, Edward Yruma of KeyBanc Capital asked management how the company will compete in the promotional environment. Pete Nordstrom, President of Merchandising answered:
Yes, the competitive issue has been, it's been made more dramatic by the fact that the online business has really made things much more transparent and really better for customers if all the choices are out there. And so, the game is changing a little bit in terms of exactly how we compete, but we want to stick with this idea that we want to have integrity and transparency with our customers and to having the best prices for the stuff that we sell.
It's important to go back to Pete Nordstrom's comments made during the previous quarter's conference call, on Feb. 20:
I think it's fair to say that the increased promotional activity that happened in December was more than we had expected and an area of concern for us going forward.
Macy's doesn't have a similar issue of a drastic need to shift its entire selling strategy to adapt to the current promotional environment. In fact, Macy's received praise from Oliver Chen of Citigroup, who told management that it has done "an amazing job with the promotional management of this environment" during an analyst conference on May 28.
Just one day later, Chen reiterated a buy rating on Macy's, citing "shrewdly planned promotions," among other factors.
In addition to Macy's holding the upper hand in its ability to adapt to current trends, investors shouldn't need to be reminded that Macy's has direct exposure to the higher-end space through Bloomingdales.
Macy's management team has direct insight and knowledge into the higher-end consumer and can pick assortments and brands that sell well at Bloomingdales and bring them to Macy's stores as another venue to attract the higher-end client.
Nordstrom, like one of its typical affluent customers, is planning a very expensive spending spree to the tune of $3.9 billion through 2018. Nordstrom's spending is intended to aggressively expand in the online space and achieve ambitious store growth targets.
Nordstrom's short-term outlook remains weak. Management has guided its depreciation and rent expense to grow by 14% in 2014 while sales growth lags behind with a projected 5.5% to 7.5% growth rate.
Macy's, on the other hand, is embarking on a similar multi-year spending spree to to the tune of $1 billion on capital projects this year to create a completely unique shopping experience using mobile technology. Needless to say, Macy's is on to something really cool, as explained by Peter Sachse, Macy's Chief Stores Officer, during an investor presentation:
So as you are sitting there on that sofa [in a Macy's store], we can bring up the dimensions of your room -- living room that you want to put that in and put that sofa right against the table and you could view because we have the dimensions with the sofa. We have all of the attributes from macys.com. So we know the sofa is 72 inches long, 48 inches wide, 36 inches deep. We put that against the wall. The customer says, my wall is eight feet, OK. Boom, this is what my sofa is going to look like. We can then show here as she is sitting on the sofa or he, all of the different fabric that comes in. Before that, it was about three trips to a back room with a big spool of fabric and we go like this, you've all done this before, right. The technology allows you just to look at it, eating in their living room, they are sitting on it, they like it, I like it in the top and firmly order right there for you.
Kimberly Greenberger of Morgan Stanley commented that until Nordstrom's heavy investment cycle passes, 10% EPS growth remains "elusive."
Macy's, on the other hand, is guiding for a minimum of 10% EPS growth in the full fiscal year. During Macy's first-quarter results, the company reiterated its full-year 2014 EPS guidance to a range of $4.40 to $4.50, up from $4.00 in fiscal 2013, which was 15.6% higher than fiscal 2012.