Nordstrom, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

A fashion retailer focused on providing a high-quality, curated shopping experience through its stores and online platforms, with a focus on strong customer service and a curated selection of high-end apparel, shoes, accessories, and beauty items.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nordstrom, Inc. (JWN) operates as a fashion retailer, offering a range of apparel, shoes, accessories, and beauty products for women, men, and children. The company’s operations are split into two reportable segments: Nordstrom and Nordstrom Rack. Nordstrom stores focus on high-end, premium fashion, while Nordstrom Rack offers off-price products. The company has a significant online presence through its websites and mobile apps. Nordstrom has a number of physical stores across the US and Canada and aims to cater to a wide range of customers who want to have good products, services and a better shopping experience.

  • Revenue Distribution: As of their most recent filings, Nordstrom’s revenues are primarily categorized as:
    • Net Sales - $3.7B for the quarter ended August 3rd, 2024
      • Apparel for Women and Men are the biggest drivers of sales accounting for roughly 40-50 percent of the total
      • Accessories and Shoes contribute a combined 20-30% of sales
      • Beauty accounts for around 10-15 percent of sales.
    • Credit card revenues: $137M for the quarter ended August 3rd, 2024,
    • This data reflects sales after markdown have been applied.
  • Industry Trends:
    • Evolving Consumer Behavior: Customers are increasingly shopping online, demanding seamless omnichannel experiences, personalized services, and value-driven pricing.
    • Competitive Landscape: The retail industry is fiercely competitive with traditional retailers, direct-to-consumer brands, and online marketplaces vying for consumer attention. Department stores have to compete with other off-price retailers, specialty retailers, and other online retailers, making the competition even tougher.
    • Focus on Digital Transformation: Retailers need to invest in technology and data analytics to enhance customer engagement, improve supply chain efficiency, and deliver more targeted promotions.
    • Changing Consumption Patterns: There has been a shift from clothes towards more experiences.
  • Margins: The company operates at a low margin, gross profit margins hover just above 30% and operating margins are almost always below 10%, making them very sensitive to demand and inflation.
  • What makes the company different: In addition to a good shopping experience, Nordstrom provides a differentiated offering via its in-house brand products and curated branded merchandise as well.

Moat Assessment: 2/5

  • Brand Recognition (Narrow): Nordstrom has a well-known brand associated with quality and customer service in the retail sector. However, this is not a deep moat, as other retailers also have established reputations. Also, as younger generations are moving towards fast fashion from other popular brands, having a historical reputable brand doesn’t provide a solid advantage to the company.
  • Customer Service (Narrow): The company’s reputation for customer service can create a degree of customer loyalty, but competitors can replicate similar strategies. This has to be maintained for many years to be sustainable, as new entrants or existing competitors can quickly up their service to better or comparable levels.

Based on the above analysis, JWN is given a moat score of 2/5. The company has competitive advantages over other companies due to its reputable brand and known customer service, but these moats are not strong as they are easily replicable by new entrants into the industry and the market itself is quite competitive.

Risks to the Moat and Business Resilience

  • Intense Competition: Nordstrom operates in a fiercely competitive environment where other department stores, off-price retailers, and online marketplaces are making their efforts to compete. New entrants are more focused on newer technologies and customer preferences, making it very hard for traditional retailers like Nordstrom.

  • Evolving Consumer Behavior: Changes in consumer preferences may lead to a decline in sales if the company is unable to adapt its offerings and shopping experiences. The trend of shifting consumer spending towards e-commerce has been affecting sales for the company, and any slow response will lead to big losses.

    • Technological disruption: The retail industry is also susceptible to rapid tech changes, as the latest technologies and their integrations with retail operations, including AR/VR, AI and personalization, etc. are slowly becoming the new normal. As such companies must be nimble enough to keep ahead or lose their competitiveness quickly.
  • Supply Chain Disruptions: Supply chain disruptions caused by global events can affect inventory availability, increase costs, and lower profitability for the company.

  • Economic Downturns: As discretionary spending goes down during an economic downturn, companies selling such products can be heavily affected, like Nordstrom. If there are job and financial losses by consumers, their ability to spend on premium fashion and other items go down.

  • Inflation: The increasing inflation might affect its products more, as customers’ willingness to pay may not increase and may turn towards low cost alternatives.

  • Debt and Leverage: The company carries a significant amount of debt, which increases financial risk if they are unable to pay, or need to re-finance at higher rates.
  • Changing Demographics: Changes in the demography of its consumers can affect their demand and can significantly affect sales, particularly if the new demographic don’t prefer its products or services.
  • Operational Challenges: Companies also run the risk of issues with the supply chain, labor relations, rising input and transport costs, issues with pricing power, and inventory management.

The business is inherently fragile. So it doesn’t have a strong business resilience. It has low margins, is very susceptible to external factors and changing consumer demand. So its economic profits can fall off very quickly.

Financial Analysis

  • Income Statement: As mentioned earlier, Nordstrom operates at low profit margins, which make it more vulnerable to external changes like economic downturns or rising input and operational costs.
    • Gross profit margins hover around 30%, and operating margins below 10%, leaving little room for inefficiencies or mistakes.
    • Revenue from stores has been shrinking and most revenue growth is through online sales, which are susceptible to strong competition.
  • Balance Sheet:
    • Nordstrom is using a lot of debt to finance operations, with debt to equity ratio consistently above 1, which means they are leveraged which increases risk in times of stress.
    • Intangible assets, mostly goodwill, accounts for a good portion of assets, which will not create any returns unless used to generate income and will be written off during any bad news or low profits. This means they are taking more risk.
    • While cash holdings may appear to be high, much of this cash is already earmarked for different operational purposes, leaving little financial flexibility.
  • Cash Flow:
    • Free cash flow is consistently negative, meaning that the company relies on debt and equity funding to operate its businesses, which may become a concern if they can’t obtain the funding or get it at favorable terms.

Recent Concerns and Controversies

  • Wind-Down of Canadian Operations: Nordstrom decided to wind down operations in Canada in early 2023, incurring costs of more than $400 million. This move has reduced its revenues and profitability from those areas, and it shows the company is willing to make major changes when needed. However it also raises concern regarding management’s ability to strategize or plan properly.
  • Supply Chain Challenges: The company has been facing supply chain issues, leading to inventory fluctuations, higher costs, and lower margins. This issue has been going on for a while and doesn’t seem like it will end anytime soon, making it concerning.
  • Market Volatility: The company’s stock price has shown significant volatility, highlighting investor concerns regarding its long-term prospects and the impact of macroeconomic factors.

These concerns highlight that the company has been facing a lot of pressures from all different sides, with competition, debt and a volatile market, making its moat very fragile. This adds to the fact that the retail industry itself is very competitive and any misstep or bad strategic decision can ruin the company’s profits and long term value.

Understandability: 2/5

  • While the basic concept of a retailer is simple, Nordstrom’s financial performance is complex and has fluctuations. The nuances of supply chain, customer behavior, intense competition, macroeconomic conditions and how they interact with each other requires more effort to understand. This is further compounded by accounting and adjustments to operating profits.
  • The company has also struggled to find a good balance between online and physical stores, which is not an easy thing to understand or make predictions on.
  • The valuation of the company is made even more complicated by the presence of goodwill and other intangibles.

Due to these many factors, Nordstrom is given a rating of 2/5 in understandability.

Balance Sheet Health: 2/5

  • The company is highly leveraged with debt-to-equity ratios consistently above 1, which is far from ideal.

    • A low cash position relative to total assets, and the debt position, makes it very vulnerable to external factors like financial crisis, economic downturn, etc, or anything that affects credit or capital markets.

    • A large amount of intangibles can be an issue, as they are a very low quality asset, that has to be properly used to bring any returns. As of the most recent balance sheet, they have a goodwill of $3.4B which is a large portion of the company’s equity of $6B.

Given the above reasons, Nordstrom’s balance sheet health is given a rating of 2/5. This makes the company very risky to invest in, particularly due to its low margins and high debts. Any adverse effect on revenues or margins will put a lot of pressure on the company’s financials.

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