There’s little secret to department stores’ struggles. As Amazon.com (ticker: AMZN) and other online retailers strip sales from brick-and-mortar stores, companies like Macy’s (M) and Kohl’s Corp. (KSS) have seen sales growth suffer.
But when it comes to e-commerce, at least one department store has been ahead of the game. Nordstrom’s (JWN) has invested millions in a multiyear effort to grow its presence online while keeping in-store experiences pristine. Yet, it has seen a 35 percent drop in JWN stock over the last year, with much of that coming since October.
The drop is disconcerting for Nordstrom shareholders, because the company seems to be doing the right things to adapt to the e-commerce platforms. But its efforts aren’t being rewarded by Wall Street.
“These challenged results clearly highlight the difficult transition the mall anchors are facing, both cyclically and secularly,” says Credit Suisse analyst Michael Exstein. “The growth of e-commerce has resulted in structural changes in these retailers’ cost structure, and we think that retailers may need to revaluate the feasibility of their operating margin goals given the structural shift to this lower margin channel.”
Where does that leave Nordstrom’s?
Adjusting the expectations around e-commerce. With Nordstroms.com, Nordstromrack.com and HauteLook.com — its flash sale website — online now accounts for 20 percent of all sales. “They have invested in the online operations,” says Morningstar analyst Bridget Weishaar. “It’s part of their success.”
But online may be showing the limits that success can bring. While the sales of online have grown, the profit the company makes from online purchases remains limited. Online revenues increased by 15 percent in 2015, but increased costs resulted in a 17 percent dip in profits.
Nordstrom’s still plans to spend $300 million in e-commerce this year, matching its budget from 2015. It’s notable that the company won’t increase its e-commerce spending, a year after boosting its budget by 35 percent.
But analysts aren’t worried about this trend. “I think they have invested very heavily over the past five years,” says KeyBanc analyst Edward Yruma. “They’re going to be more tactical with where they are employing their investment in technology.”
Brick-and-mortar stores remain an experience. One may assume that brick-and-mortar stores would get the short straw — either in customer service or in its offerings — as a retailer pours resources into e-commerce. But that’s not the case at Nordstrom’s.
“It’s pleasant to go to the stores,” Weishaar says. “When you walk into a Nordstrom’s, you can ask people questions there and they have a grasp of the product.”
This is one reason why Weishaar isn’t too concerned with a nearly 1 percent drop in full-line store sales during 2015. Instead, it’s fashion to blame. With fewer new fashion trends — everyone has already bought skinny jeans — consumers turned their attention to personal technology like Fitbit (FIT) wristbands, and household goods. That left the department store emptier than usual. But customers will return to apparel once there’s a new fashion trend to energize them, Weishaar says.
Of course, that will mostly depend on whether or not other trends, such as low unemployment, wage increases and cheap gasoline remain. With money in the pocket, consumers are willing to buy, if there’s a reason to do so.
Nordstrom Rack’s success can have a cost. The growth of Nordstrom’s off-price store Nordstrom’s Rack is a success story. From 2012 to 2015, sales increased 44 percent as the number of stores blossomed to nearly 200.
“It attracts a younger consumer,” Yruma says. “Stores are much smaller” and the company is being opportunistic on where it grows.
So far, there’s no evidence that the growth of Nordstrom Rack has cut into Nordstrom’s department store sales, despite the lower-priced offerings. If that happens and average in-store sales drop, investors will really be concerned.
Even so, it’s hard to say how much more growth Nordstrom Rack can offer. In the fourth quarter, comparable sales between similar Nordstrom Rack stores fell 3 percent from 2014.
Shares are on sale, but there’s a reason why. The fall in the price over the past year has left Nordstrom’s cheap. Its price-to-earnings ratio of 16.3 is below its five-year average of 17.3.
Its margins have suffered as Nordstrom’s shifted its focus to include e-commerce and Nordstrom’s Rack. Weishaar thinks that Nordstrom’s operating margin will jump from 7.6 percent today to the 8 percent range, but that remains below Nordstrom’s three-year historical average of 9 percent.
And while the company repurchased 12 million shares in the fourth quarter of 2015 for a total of $675 million, there’s not enough to get this solid company propelled forward again. Weishaar has a target price of $54 for JWN stock, which only offers a 4 percent upside from its current price. Other analysts are mixed, with only three of 10 analysts who follow the stock rating it a “buy.”
That leaves the brick-and-mortar stores’ riddle for adapting to e-commerce still very much unsolved.
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Nordstrom’s Stock Is on Sale — But It May Not Be a Bargain originally appeared on usnews.com
