This Upscale Retailer Has a Balanced Growth Strategy

Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When you are dealing with the rich and the famous, you need to put your best foot forward. That is why for the nation’s largest luxury department-store chain, Nordstrom (NYSE: JWN), customer satisfaction is the mantra. And over time it has proved that with the right assortment of merchandise, exclusive brands, and convenience of Internet shopping, it can remain a preferred choice of its customers.

The company is all set to take its retail business to the next level. It is following a balanced expansion strategy focusing on both e-commerce and adding physical stores.

E-commerce is heating up the retail market

With e-commerce spending in the US growing by 15% last year to a huge $186.2 billion, according to ComScore’s estimates, few retailers can ignore this trend.

During the first quarter, the country’s overall retail climate was fragile on account of weather as well as weak customer spending. It is interesting to note that among the big departmental stores, Nordstrom and Macy’s (NYSE: M) – both strong in e-commerce – had better sales growth than Dillard’s (NYSE: DDS), which is still catching up on the trend.

Nordstrom grew its retail sales by 4.8% to $2.66 billion and Macy’s posted a 4% increase to $6.39 billion. In comparison, excluding its contract business, Dillard’s grew its sales by 1% to $1.53 billion. The same-store sales growth for these three retailers was 2.7%, 3.8%, and 1% respectively.

As per Alexa.com, which provides Internet traffic stats, Nordstrom ranks 221 on the list of all visited e-commerce site in the US. Macy’s ranks 129. It does not break out its online sales numbers, but 2012 figures indicate that Macy’s may be deriving around 14% of its total revenue from online sales.

Dillard’s is also trying to increase its online presence and opened a new Internet fulfillment center in Little Rock last year. Although its online sales grew 21% in the quarter, on Alexa.com it ranks 1,156 in the US, and is no match for Nordstrom or Macy’s.

Nordstrom’s focus on e-commerce

E-commerce has always been a thrust area for Nordstrom. It integrated its website with its stores way back in 2009, much ahead of most of its rivals. Nordstrom virtually offers its entire physical-store collection online.

During the first quarter it generated approximately 11% of its net sales from e-commerce. The company saw a 25% growth in this segment, which came over a 44% growth in last year’s first quarter. It added some 100 odd new features to its website, improved its mobile application, and increased the speed of fulfillment and delivery.

However, Nordstrom’s main focus area is "personalization." This would allow its visitors to also receive product recommendations based on their individual needs and have a customized experience on the website. Management has been attracting talent from Amazon and Microsoft for taking ahead these initiatives. The company is in its early stages of implementation and stands to gain as this gathers steam.

Adding stores in the US

Nordstrom is keen on increasing its retail footage in the US. While its main area of focus is on adding discount Rack stores, it will also add full-line stores in Manhattan and Puerto Rico.

Nordstrom opened five Rack stores during the quarter and another three subsequently. The company plans to open 14 more Racks in 2013 and own more than 230 locations by 2016. In addition, it extracted 20,000 square feet of incremental selling space by removing some of its fixed cash registers.

Macy’s, on the other hand, opened one new Macy's store during the first quarter and expanded into an additional location in an existing mall. It will open more Macy's stores, a Macy's replacement store, a new Bloomingdale's store, and a Bloomingdale's Outlet store in the remainder of fiscal 2013. Dillard’s has not announced any expansion plans yet.

Canada expansion

Canada is the sixth most preferred global destination for retailers, according to a report by consultancy firm CBRE. Of the US retailers, Target has forayed into this market. Now it's Nordstrom’s turn.

Nordstrom will open its first store in Calgary in 2014 fall. Subsequently, it will add one more in Ottawa and Vancouver, respectively, and two more in Toronto. Neither Macy’s nor Dillard’s have any stores in Canada. However, Macy’s accepts online orders from the country at a flat shipping fee of C$9.99.

Nordstrom’s will compete with upscale Canadian retailers like Hudson’s Bay and Holt Renfrew and will start its promotions well ahead of its actual launch to build up the excitement. Success will depend a lot on pricing. Typically, there is a price differential of 10%-15% between US and Canada due to incremental costs involved.

Sensing a competitive disadvantage, Nordstrom has declared that it will match prices with competing Canadian chains. It is already known for exclusivity and customer service. Now, if it can keep its word on the pricing, Nordstrom can see excellent growth in Canada. If all goes well it may open a total of at least 8-10 full-line stores and 15-20 Nordstrom Rack stores across the country.

Total investments

For all its planned expansions, Nordstrom has a capital-expenditure budget of $3.7 billion over the next five years. Around $2.8 billion will go into new stores, brand building, and leveraging the company’s multichannel presence. The remaining $900 million will go to support e-commerce and technology initiatives.

Thanks to its excellent planning and execution, Nordstrom has had good returns on its capital invested. In 2012, ROIC had been at its five-year high of 13.9%, and in the first quarter, it inched up to 14%.

Net-net

Nordstrom has appreciated 18.97% over the last 12 months and also paid a $1.20 per-share dividend to its investors. With domestic store additions, Canada expansion, and a solid e-commerce position, the company is on a good growth path which would bring nice returns for the company and also those who have invested in it.

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Eshna De has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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