Nordstrom’s Mixed Bag

Despite being named best in class among department store brands, the past year has been a mixed bag for Nordstrom. Now, with its stock being downgraded by industry analysts and a path forward unclear, the luxury brand must prove it can survive among the changing tides of retail.

This past week, Nordstrom’s stock rating was downgraded by Citi from “buy“ to “neutral.” Citi Analyst Paul Lejuez said in a research note: “Even with the stock near 12-month lows, we have a hard time telling investors to buy at this time.” This was the straw that broke the camel’s back in a lackluster year that saw Nordstrom’s shares falling nearly 32 percent over 12 months, teetering at $49 a share. As The Motley Fool and other retail industry pundits point out, a big part of the decline can be attributed to the company’s less-than-stellar third quarter earnings report. Nordstrom missed estimates for both revenue and earnings, posting just 0.9 percent sales growth, a significant slowdown compared to the 4.8 percent growth reported during the second quarter.

MarketWatch notes that skepticism over the high-end department store’s ability to compete with more middle-tier competition in promotions and discounts may be another key factor in the downgrade of the stock. “Nordstrom is not set up to be a promotional retailer, and while it has altered promotional strategy somewhat over the last couple of years, it is tough to counter mid-tier competitors that frequently offer 50 percent to 70 percent sales,” analysts wrote. “We believe the competitive dynamics will pressure sales and margins into 2016.”

In addition to worries over Nordstrom’s ability to compete, Lejuez also questioned two Nordstrom-specific issues in his report. Although the company has been pouring billions of dollars into its expansion into Canada, as well as its footprint in New York City — while, at the same time, staying ahead of the curve online — these investments have yet to pay off. As Lejuez remarks, “these don’t seem like bad investments, but it is unclear what the company is getting for it now that sales have slowed.” Lejuez also stated that he expects Nordstrom’s 2016 net income, excluding the sale of its credit card portfolio, to be below where it was in 2012.

The upscale Nordstrom, as The Motley Fool notes, operates 320 stores nationwide, including 194 Nordstrom Rack locations (its discounted brand). By comparison, Macy’s operates almost three times as many, with 900 locations across all of its retail brands. Despite its smaller operating size, in 2015, Nordstrom generated $14.2 billion in revenue, equivalent to just over half of what Macy’s generated.

However, even the company’s off-price Rack business was being called into question in the downgrade, as MarketWatch shares. “As much as we like the off-price channel in general, Rack does not have the same level of non-apparel (i.e., home) as its off-price peers,” an analyst observed. “At a time when apparel trends are weak, Rack doesn’t have the same traffic drivers that other off-pricers have, and it is not a simple fix.”

But it’s not all bad news for Nordstrom. Aside from the Citi downgrade (and corresponding analyst note that draws attention to a plethora of woes dogging the retailer), Nordstrom has widely been seen as doing better than many of its peers.

As Retail Dive noted in a recent article, Nordstrom’s reputation for stellar customer service and tech investments may be keeping the brand afloat for the time being. Retail “futurist” Doug Stephens spoke with Retail Dive late last year, singling out Nordstrom as having some of the fundamentals that other department stores lack. “You wonder if any department store can afford to be a department store anymore unless they’re high-end,” Stephens said. “Look at JCPenney, still dying a slow death. And Macy’s for all their bravado about omnichannel, still their sales are underwhelming. Nordstrom’s service proposition is still excellent, the service is tremendous, the assortment is really good, they have good buying principals and, at the same time, they’re technology-savvy.”

So, while Nordstrom may have suffered another bump in the road to maintaining its retail dominance, there remains to be a consensus on whether the future will be progressively rosier or more difficult for the consumer-favorite brand.