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Nordstrom bets on lavish 24-hour stores with coffee bars to drive sales

Brian Sozzi

Nordstrom (JWN) scion Erik Nordstrom is eager to put by his own admission a financially disappointing 2018 in the rearview mirror.

Considering some of the exciting things the department store chain, founded as a shoe store by Nordstrom’s great-grandfather in 1901, is working on right now, one can’t blame him.

Last year was “not at our standard,” 54-year-old Nordstrom told Yahoo Finance in an exclusive interview.

Nordstrom’s fourth quarter same-store sales at its full-line stores fell 1.6% due to customer traffic softness. Same-store sales at the Rack outlet business rose 4%. Gross profit margins declined 33 basis points from the prior year as Nordstrom took markdowns to move slow-selling merchandise.

Walking around the expansive New York City men’s store with the company’s co-President (Erik’s brother Peter is co-president as well) brings to life some of the things the high-end department store is banking on to drive sales in the digital age. The store — opened in spring 2018 — has two coffee bars, 24/7 returns and technology that lets shoppers better customize their work wardrobe.

And of course there is the legendary Nordstrom shoe department, outfitted with various one-off designs for guys from Gucci and Prada that can’t be found elsewhere.

“We need to move faster,” Nordstrom said, acknowledging the shopping environment around the company continues to rapidly shift. That includes the rise of social commerce on Facebook-owned Instagram and up and comer Poshmark. It also means a world where department stores are being more aggressive in their online promotions, using big data to capture sales when shoppers are browsing.

Nordstrom testing a host of new services at its New York City men's store. (Photo by Astrid Stawiarz/Getty Images for Nordstrom)

Investing in the store of the future

That endless pressure requires a retailer such as Nordstrom to juggle two responsibilities — win each day and reimagine the stores for the future of shopping. Not an easy task to execute on flawlessly and sometimes, it comes at the expense of near-term profits.

An argument could be made, however, that Nordstrom is moving at lightning fast pace.

The company has had, by far, spent the most on capital expenditures as a percentage of annual sales among department store rivals Macy’s and Lord & Taylor. Hence, a visually appealing, service-oriented store such as the New York City’s men location and a giant 320,000-square-foot women’s store opening across the street this year that will have its own share of bells and whistles.

Moreover, the outsized investment has allowed Nordstrom to have an online business on par with its stores in terms of profit margins — almost unheard of in retail.

Nordstrom’s online business represents about 30% of its overall business.

“We have been investing in the right areas,” Nordstrom says.

But to Nordstrom’s earlier point, Wall Street likely wants these investments to begin showing up more on the top bottom lines soon.

Nordstrom’s same-store sales at its full-line and Rack outlet stores rose 0.9% and 3.5%, respectively, last year. Adjusted earnings before interest, taxes, depreciation and amortization dropped to $1.4 billion from $1.5 billion a year earlier.

For this year, Nordstrom sees net sales growth of 1% to 2%. Earnings are expected to be in the range of $3.65 to $3.90 a share.

Nordstrom’s stock has fallen 8.3% the past year, while Macy’s has dropped 15%. The S&P 500 has gained 8.6%.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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