Analyst: Nordstrom’s decision to close 16 stores is ‘prudent’

Closing 16 of its full-line stores – around 14% of the total store base – is a significant move by Nordstrom. However, in our view, it is not so much of a step back from physical retail as it is an optimization of the store portfolio.

We have long since stated that Nordstrom has too many department stores that are in sub-optimal locations. Since those shops were originally opened, the demographics in the trade areas and the competitive mix have changed for the worse. The result is that Nordstrom has been left exposed.

A pruning of the estate was always on the cards. However, the coronavirus crisis has hastened this move and persuaded Nordstrom to quickly get out of shops which have low profitability and poor prospects. This is a prudent move that will help the company preserve cash in the longer-term and focus its investments on the locations which provide a much better return on investment. This includes expansion in large cities and the development of a network of smaller Nordstrom Local stores.

We believe that the strong uplift in digital sales over the past month or so has shown Nordstrom that it can transfer a high proportion of revenue online even when stores are closed. This makes the decision to shut underperforming outlets somewhat easier and moderates the potential reduction in revenue. 
 
Although Nordstrom does not have any exposure to severely ailing malls, many of the closures will be in secondary markets where the loss will be felt by mall operators and other tenants. It is a blow for malls already severely bruised by the crisis and slowdown in retail.

Looking ahead, we don’t believe Nordstrom will be the only player reviewing its store fleet. The coronavirus crisis does not, in any way, spell the end of physical retail. However, it will speed the pace at which underperforming retail space is removed from the market.