Analysis: Nordstrom needs to capitalize on, press home its advantages post-pandemic

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Analysis: Nordstrom needs to capitalize on, press home its advantages post-pandemic

By Neil Saunders, managing director of GlobalData Retail - 05/29/2020

While Nordstrom performed modestly better than many other department stores over the course of the crisis, the overall gap between it and the rest was relatively slight. In many ways this is a disappointing outcome given the company’s much more developed e-commerce business. Nordstrom’s digital sales grew by 5.4% during the quarter and although this admittedly came from a higher base, it underlines the fact that not that many sales were transferred from stores to the online channel.
 
As a business with a significant cost base, Nordstrom felt the full force of the deterioration in trade with a loss of $521 million. As much as this is manageable from a financial perspective, it has pushed up liabilities and leaves the group with much less room for maneuver. Worryingly, if trade takes time to return to more normalized levels – which we believe it will – Nordstrom is likely to see a further, albeit more modest, deterioration in its financial position.
 
This relatively bleak outlook is one of the reasons the firm has been quick to cull unprofitable and unproductive stores. The closure of 16 full price shops may not sound significant but it represents 14% of the total store base, making it a fairly dramatic decision for Nordstrom to have taken. Overall, we applaud the move and believe it is overdue. For too long, Nordstrom has had stores in locations that are suboptimal, and which were not delivering good returns. Getting rid of these will help stem losses and allow Nordstrom to focus investments in areas where it gets more bang for its buck.
 
A store closure program does not mean that Nordstrom is turning its back on physical retail. Indeed, as this quarter’s results show, stores are still a vital component in terms of driving sales. What is more likely, however, is that Nordstrom will take a much more flexible approach to store formats and will focus more on its Nordstrom Local concept and perhaps other new smaller formats as a mechanism for growth in the full price part of its business. Arguably this store format diversification is something all retailers now need to explore and which some, such as Macy’s, are already examining. Nordstrom, however, has a head-start on the rest of the market which underlines the group’s prescience and forward thinking.
 
Another factor that will help Nordstrom on its road to recovery is the off-price Rack business. While this suffered – like all off-price players – during the lockdown, it performed a little better because it has an e-commerce platform which meant all sales were not sacrificed when stores closed. 

As we move into a recovery phase for retail, underlying trends such as a more value conscious consumer will help Nordstrom Rack achieve some better numbers. However, we believe that there is still unfinished work at Rack and Nordstrom must improve assortments and try and develop categories such as home furnishings if it is to really take advantage of emerging trends.
 
The full price of the business saw sales decline by 36% in the quarter. This is better than for rival department stores and reflects the fact that, overall, Nordstrom has a much stronger proposition. However, like Rack, there is a lot more work to be done in terms of improving assortments and doing more with own-brands in order to make Nordstrom more distinct and interesting compared to competitors.
 
Overall, Nordstrom emerges from the pandemic in a reasonable position. It has far more going for it than its peers, but the recovery will be slow, and it needs to work hard to capitalize on and press home its advantages.

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