Nordstrom Is Struggling To Generate Sales Growth, but Its Brand Advantage Provides Confidence

Nordstrom JWN continues to be a top operator in the competitive U.S. apparel market. The firm has, in our view, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While its recovery from the pandemic has been rocky, its profitability has returned, and we believe its brand intangible asset is intact.

We believe Nordstrom is responding well to changes in its market. The company has about 94 full-price stores, with nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. We view this as an advantage, as some lower-tier malls are unlikely to survive. Moreover, Nordstrom has a presence in discount retail with Rack (about 250 stores) and significant e-commerce (38% of its sales in 2022). Still, the firm’s full-price business is vulnerable to weakening physical retail and competition from key brands’ direct-to-consumer efforts, while Rack competes with firms like no-moat Poshmark, narrow-moat TJX, narrow-moat Ross, and many others.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through Local and other initiatives), and a broader off-price offering. Among the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from about 10% now) and greatly expand the number of items offered through partnerships (to 30% from about 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. Nordstrom’s recent struggles to manage through industry turmoil and exit from Canada have put these goals in doubt, but we forecast it will consistently generate more than $1 billion per year in operating cash flow and achieve ROICs in the teens by 2025, and reach $16 billion in annual revenue in 2028. However, we anticipate operating margins will top out at just over 6% in the long run due to intense competition.