Taking the Long Road
We are long-term investors here at MyWallSt and recommend companies that we believe will have consistent growth for years to come. Updates are an opportunity for us to reaffirm our stance on a company while keeping you up to date on its developments. By renewing our comments with the latest information, we ensure that investors have confidence in our selections, regardless of their start date.
In October 2020, the Nordstrom family made a rare public appearance to celebrate something the family had been talking about for over 100 years: the opening of their New York City flagship store. Despite being the home of some of America's most famous department stores like Bloomingdale's, Bergdorf Goodman, Saks Fifth Avenue, and Barney's, Nordstrom had avoided the metropolis, opting instead for the high-end malls of the West. However, with the encroachment of e-commerce, in-person shopping has become all the more reliant on its experience and opulence. This is one of the reasons luxury shopping continues to thrive in the face of Amazon. When you buy a Cartier ring, you want the complimentary champagne and fitting service, to see it placed in the box and wrapped in branded paper, and of course, you must have the burgundy bag. This desire for spectacle was exactly what fueled Nordstrom's Manhattan store.
Located near 5th Avenue and Central Park, the retailer was confident it would attract rich locals and more importantly, excited tourists. Nordstrom has always understood that a great store is as much a marketing opportunity as a point of sale so it took its time when entering the Big Apple. The company spent seven years and $500 million designing the building and its interior, hoping to create a unique, boutique-like space a step above the brand's already high standards. It features tailoring services, a beauty department with over 100 brands, five restaurants, and a shoe bar, where patrons can sip wine or cocktails while trying on a pair of Louboutins. Its opening generated positive media and frenzied visitors but then disaster struck: a global pandemic. Within six months of opening, the new flagship was forced to temporarily close.
The shuttering of retail is just the latest bout of bad luck to impact Nordstrom and its shareholders. The day its New York store opened, its stock was down 40% from its all-time high in 2015 thanks to one predominant factor: it’s a department store. After years of over-expansion and a complete lack of differentiation, many department stores seem ready to fade into oblivion and this has frightened investors. Large players like Macy's, Dillard's, and JC Penney have been experiencing negative revenue growth for years and now seem unlikely to ever return to their pre-pandemic levels. That being said, Nordstrom's revenue was not trending this way pre-pandemic and should be able to rebuild due to its diversification, consideration, and upmarket status.
Nordstrom only operates 100 stores; Dillard's has 282, Macy's has 572, JC Penney has a whopping 689. This keeps expenses high, especially when none of these retailers have a robust e-commerce presence, meaning the stores cannot even be effectively used as fulfillment centers. Nordstrom, on the other hand, has kept its store numbers down, preferring high-income areas and filling its sales floors with designer items. Nordstrom is more similar to a luxury store than a JC Penney's. Rather than discounting merchandise in-store and risk tainting the perception of the brand, Nordstrom sends its excess stock to the Nordstrom Rack. There are 248 of these outlet stores across the country and their constant merchandise turnover and discounted prices make them an appealing experience to customers on the hunt for treasure. Comparable to TJ Maxx and Marshalls, which have experienced explosive growth even in the face of e-commerce, Nordstrom Rack should continue to perform well.
Additionally, the pandemic provided Nordstrom with an opportunity to prove its digital investments would pay off. Since 2018, the company has been focused on building a comprehensive platform and app, an effort investors have displayed little interest in. During 2020, Nordstrom's digital revenue grew by 23% and helped steady the ship during store closures. It also recently allowed third-party sellers on the platform, diversifying merchandise without increasing expenses, and helping grow new customers by 50%.
While department stores can seem like a risky investment, Nordstrom is not a regular department store. If you believe experience shopping, both luxury and off-price, still has a chance, and are willing to wait for a sentiment shift, it may just be the stock for you.
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