EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Nordstrom Begins to Implement Initiatives to Support Its Brand Intangible Asset

In our opinion, Nordstrom is one of the best operators in the department-store space, having successfully developed a differentiated curated product offering and managed store count and location to match its niche consumer base. The company has invested in advanced omnichannel capabilities and used an owned off-price channel to maintain full-priced sell through at namesake stores, while catering to a younger customer base. Although investments have been high, with capital expenditure climbing from an average of 4% of sales in 2009-12 to more than 7% in 2015, we think store improvement, expansion, and IT spending have been wise and that these will begin to scale down (capital expenditure was already less than 6% of sales in 2016 and less than 5% in 2017). We believe this economic profitability is sustainable.We think the firm can achieve low-single-digit revenue growth (albeit decelerating from the almost 5% last three-year average) through the following: further rollout of Nordstrom Rack stores, increasing from 232 in 2017 to just over 300 by 2022; new product lines, including Madewell and TopShop, at full-line stores; expansion of the rewards program; and e-commerce penetration increasing from 25% in 2017. We don't think the shift to the lower-margin e-commerce channel will pressure the margin (lower selling and labor costs offer the same contribution margin) but anticipate industry headwinds (lower traffic at stores, increasing pricing tactics) could act as a drag on the company's ability to capture optimal gross margin, which we do not expect to recover to previous high levels. In the long term, we expect selling, general, and administrative expenses to scale, and we see expense-reduction programs adding additional upside through a focus on fulfillment, tech, and marketing expenses.