Retail sector: Value-focused consumers spell trouble for Nordstrom?

Shares of Nordstrom (JWN) are trading lower after the company posted its fourth quarter report, warning investors that revenue could decline as much as 2% in 2024. The company also saw a decrease of 3% year over year in net sales at traditional full-priced stores. These results come as consumers opt out of purchasing full-priced items and instead trade down –– as evidenced by sales of Nordstrom Rack, Nordstrom's discount chain.

BMO Capital Markets Managing Director Simeon Siegel joins Yahoo Finance to discuss Nordstrom's quarterly report amid shoppers' changing behavioral patterns.

Across the sector, retailers like Macy's (M) and Best Buy (BBY) are moving into smaller stores, but Siegel suggests that isn't necessarily a move Nordstrom should follow: "The bigger question to me is the focus on having smaller stores or is it just that there's a focus on being more profitable? So I told you that...revenues across the board right now are up, sales are up somewhere between 2 to 4% on average across the group that I've been looking at, but gross margins, when we think about what they're actually generating on this business, that's up a lot,150 to 200 basis points...So whether it was the whole D2C in venture capital conversation that we saw in startups, or it's simply this idea that in this post-pandemic world, companies realize they need to make money on the products they're selling and smaller stores is a more productive way of doing that if you're not generating returns on the larger stores. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Getting more insight into the state of the consumer with results from Nordstrom, Abercrombie, and Ross Stores. And it was a mixed bag with Nordstrom in Ross Stores both issuing stark warnings about the state of the consumer. But Abercrombie painting a slightly different picture for those who love holes in their jeans. Seeing sales for its holiday quarter jump over 20%. For more on this, we're joined by Simeon Siegel, BMO Capital Markets Managing Director here. Simeon, all right. All just for a moment there on the jeans.

But still, a great job that the management team there seems to be doing here. But overall, state of the consumer, we've had a lot of retail earnings come across this week. How do you continue to wade through some of the reports that we've seen?

SIMEON SIEGEL: So yeah. You love your ripped jeans. I've been watching this the last segment. This is great. I think clearly other people do as well. But most importantly, we talked about this last week. Revenues are up. Most retailers, it's funny. It's like even we look at Nordstrom, we look at Ross, we look at the businesses that have been reporting, you are seeing revenues grow. And so that goes back to-- you and I had talked about this. Whether it's healthy or not, it's another question.

But the consumer is actually spending. And so I think that's an important thing that we have to keep in mind.

- Simeon, one of the common threads that we've seen throughout this earnings season, really recent moves from management within the retail sector has been this move to smaller stores in order to better resonate with the consumer. Is that a trend, when you take a look at maybe what Best Buy is doing, what Macy's is doing, and even the success maybe at Abercrombie & Fitch, is that a sign that type of move makes sense? And why do you think that is?

SIMEON SIEGEL: Yeah. So I think it's a great point. And I think the question is, is that happening on the offense or is it defense? The answer for the most part is defense. But is it more-- the bigger question to me is the focus on having smaller stores or is it just that there's a focus on being more profitable?

And so I told you that the average-- the revenues across the board right now are up. Sales are up somewhere between 2% to 4% on average across the group that I've been looking at. But gross margins, when we think about what they're actually generating on this business, that's up a lot. 150 to 200 basis points is sort of where is the entry this quarter.

So whether it was the whole D2C and venture capital conversation that we saw with startups or whether it's simply this idea that in this post-pandemic world, companies realize they need to make money on the products they're selling. And smaller stores is a more productive way of doing that if you're not generating the return on the large stores. It doesn't mean there aren't still large stores, but it means these companies that are looking at their incredibly large boxes without the productivity to justify them are saying, you know, what? Maybe we could do more with less. And I think that is a healthy approach, if you're not getting the volume.

BRAD SMITH: It seems like consumers are also gravitating towards more value hacks, more value consciousness. We've also discussed that at length in the past as well. And it shows up in some of the retailers that you track as well. I'm thinking about Ross, and I'm even thinking about T.J.Maxx as we got those earnings results days ago as well. Where in that kind of value hack, value consciousness does that also place more emphasis on not just the deals that are being offered but the inventory mix that certain retailers are carrying as well?

SIMEON SIEGEL: Well, Brad, look at Nordstrom. Nordstrom, the full price sales were down, the rack was up. So I think you have exactly that. It's very easy to look at that divergence and say, absolutely, consumers like value. I think the issue is consumers always like value. Like, we always like value. Here you are trying to get 5% off your denim because it's a little bit less fabric in the holes. Like we want to try and find the best deals we can at whatever price level we want to go towards.

The interesting thing about T.J. versus Ross and versus some others, I don't really think T.J. sells cheap. Clothing I think they sell expensive clothing cheap. I think that they try to take a higher level, something you would get and pay full price at a department store and give it to you at a better deal.

And so I think that no matter where you are, you want value. And the question is, does that mean you demand discounts? Does that mean that you're not willing to pay up? Right now, the fact that the gross margins are up so much, would argue that give a consumers-- and again, look at your Abercrombie. Give a consumer something that they want to buy, they're willing to pay for, and they will.

So I think that is encouraging. But I do think we're seeing execution matter a lot. I think we are seeing divergence and I think that what it means is you're not going to get helped by the COVID stimulus lack of inventory, price points are up for everyone. I think we're now in this element where good companies are thriving. And we're seeing it. And we're seeing execution matter. And companies that had effectively been just enjoying the benefit of a macro environment where people wanted to spend more and felt that they were more flush with cash, those are the ones that are starting to slow down.