Berko: Time to look for a sale of Nordstrom?
Friday, September 27, 2013 7:00 AM
Dear Mr. Berko:
Please tell me what you think of Nordstrom. I bought shares of its stock at $32 in 2005. Should I sell the stock and take my big profit or continue to hold?
L.P., Syracuse, N.Y.
If the well-known humorist, philosopher and manservant Sancho Panza were alive today, he might be heard lamenting, “The firing of those delightful piano players in all 238 stores suggests that Nordstrom has lost its elegance, its pedigree and its cachet.” And Sancho would be as right as a trivet. Small tells such as this suggest a major change in management’s direction. Nordstrom Inc. (JWN-$56.08) management seems to be down-classing. And this is depressingly evident to many devotees who peruse the aisle clutter, the reduced inventory choices and Target-priced merchandise. Even more disappointing are the salesfolks who work the floor. I remember the salesperson in the San Diego store who greeted me by name in 1995, 1998 and again in 2001. I also remember my sales representatives from the Boca Raton and Tampa stores. They, too, knew my name and my size, which admittedly is easy to remember. The fellow at the Boca Raton store would reach me by phone when he saw something he thought I’d like. These sales associates were proud to work at Nordstrom. They were compensated well. They earned good benefits. And they comported themselves as professionals. But that was another era in another time. Today the lines among Nordstrom, Dillard’s, Macy’s and even Kohl’s are blurred.
JWN, a $12.7 billion-revenue chain, is one of the strongest operators in the department store business. JWN prided itself on being customer-centric. It filled an enviable niche in luxury shopping without being extravagant. JWN offered high-quality merchandise, with-it fashion, superb service and a liberal merchandise return policy. In fact, it’s rumored that a Nordstrom location in Chicago once accepted the return of four automobile tires that were purchased from Sears because the customer insisted they were purchased from Nordstrom, even though Nordstrom doesn’t retail tires. But those days are gone. Though JWN’s merchandise, in most cases, is still a cut above, it lacks the exclusivity, the character and the wow factor that made Nordstrom an intriguing shopping experience.
JWN has lost most of its proud sales associates, and though I believe revenues will continue to grow, I think they will grow more slowly. And net profit margins may commence to decline slowly as JWN retails less expensive merchandise with smaller markups, which require higher turnover to generate the same revenues. And because JWN is beginning to change its merchandising formula, I suspect its return on capital and return on shareholders’ equity will decline modestly. I’m convinced that the special Nordstrom experience, which was enjoyed by both investors and shoppers, peaked this year. The change in the quality of Nordstrom’s merchandise, size availability and product display – designed to attract a younger, less affluent customer – seems to have slightly dulled the Nordstrom image. And I think this can also tarnish JWN’s share price potential. Meanwhile, the competition is beginning to smell blood. Macy’s has begun upgrading its inventory to capture more of the high-end customer’s wallet. Saks Fifth Avenue has been adding affordable luxury items to its floor plan. Neiman Marcus and Lord & Taylor are close behind.
On the plus side, since JWN’s 2-for-1 split in 2005, when the shares were trading in the $70s, management has been returning big bucks to shareholders and repurchasing shares on the open market. In 2005, JWN paid a dividend of 32 cents a share; today that dividend has increased nearly fourfold, to $1.20. The board has been repurchasing shares each year at a brisk clip. Since 2005, it has returned more than 80 million shares to the treasury. The company has a strong balance sheet and tech-savvy management that understands how to help its employees become efficient. However, JWN’s share price is trading close to its all-time high, and I doubt there’s enough juice remaining in the stock price to warrant your holding the shares. Sell and take a profit.
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