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Morningstar | Narrow-Moat Nordstrom Fighting Competitors With Its Own Off-Price Stores and E-Commerce

We believe narrow-moat Nordstrom continues to be a top operator in the competitive U.S. apparel market. Nordstrom has, in our view, cultivated a loyal customer base on its reputation for differentiated product and service and has built a narrow moat based on an intangible brand asset. While no-moat Macy’s and other department store competitors have suffered declining sales, Nordstrom increased revenue from about $10 billion to $16 billion between 2010 and 2018. Nordstrom’s full-price and Rack (off-price) stores have consistently reported positive same-store sales over this period. We forecast average annual sales growth of 2% and 3% for Nordstrom’s full- and off-price segments, respectively, over the next 10 years.We believe Nordstrom is responding well to changes in its market. The company has about 140 full-price stores, and nearly all of them are in desirable Class A malls (sales per square foot above $500). Still, Nordstrom’s full-price business is vulnerable to weakening physical retail. Online apparel sales as a percentage of total U.S. apparel sales have more than doubled since 2010 (to over 20%), while discount retailers have continued to open stores (e.g., narrow-moat Ross Stores has opened more than 500 stores since 2010). NPD estimated off-price sales represented 75% of apparel transactions in 2016. Rack has been part of this trend, as sales for this segment have nearly doubled since 2012 to $5.2 billion in 2018.Nordstrom has also invested heavily in what it calls “generational investments.” This plan, which includes expansions in e-commerce and new territories (Canada, New York City), has lowered EBIT by approximately $580 million over the past four years (with consolidated operating margins eroding from more than 10% five years ago to just 6% presently). Nordstrom expects the generational investments to produce positive EBIT by 2022, suggesting they may produce more than half of its EBIT growth over the next four years. We view the plan as promising, but unproven, with our forecast calling for Nordstrom’s operating margin to improve to 5.7% in 2024 from 5.3% in 2019.