Can Nordstrom Get Back to Faster Growth?
Last Thursday, Nordstrom reported solid, though not spectacular, third-quarter results. Nordstrom's long-term plan calls for high-single-digit revenue growth, but the company will fall short of that goal this year. However, much of the shortfall is the result of particularly difficult comparisons to 2012.
Looking forward, growth should pick up in 2014 and 2015, which will have a higher level of new store openings. Furthermore, with easier revenue comparisons, same-store sales growth is likely to improve. In short, despite somewhat slower growth in 2013, Nordstrom's long-term uptrend is intact.
Growth stays steady
While a calendar shift distorted Nordstrom's quarterly sales numbers, revenue is up 4.7% year to date, despite a tough comparison to 2012, when revenue grew about 10% (excluding the effect of an extra week in the retail calendar).
In the third quarter specifically, the Nordstrom Rack business grew revenue by 16%, due to stronger same-store sales growth and new store openings. This is helping to offset weaker sales performance in the company's full-line stores.
The Rack is back on track
Nordstrom's most important growth initiative is its Nordstrom Rack off-price concept. Last year, the company announced that it would more than double the number of Rack stores from 110 to around 230 by the end of 2016.
This decision to accelerate the expansion of Nordstrom Rack was largely driven by strong sales performance at the Rack. In 2012, Nordstrom Rack achieved stellar 7.4% same-store sales growth, following a 3.7% rise in 2011. A secondary motivation was the opportunity to earn a higher return on investment, as Rack stores require less up-front capital expenditures than full-line stores.
However, that growth plan ran into trouble earlier this year as same-store sales growth abruptly decelerated to just 0.8% in the first quarter. Fortunately, the slowdown in growth was just a blip on the radar; same-store sales growth bounced back to 2.4% in Q2 and 3.7% last quarter.
Nordstrom has opened 19 Rack stores in the last year (excluding relocations), with four more coming in the fourth quarter. This moves the company closer to its 2016 goal, but it still has to open about 90 more stores to hit its target. This means that store growth will accelerate going forward. Indeed, Nordstrom plans to open about 30 Racks in 2014.
Growing the legacy business
While Nordstrom Rack provides the bulk of Nordstrom's long-term growth opportunity, the company still has room to expand its full-line store count. This year, Nordstrom relocated one full-line store, but there were no new store openings.
By contrast, the company has three new full-line stores set to open in 2014, including its first store in Canada. Nordstrom will continue its growth in Canada in 2015 and 2016, with four more stores set to open in that time frame. Long term, CEO Blake Nordstrom has stated that Canada can be a $1 billion business, consisting of eight to 10 full-line stores and 15 to 20 Racks. Nordstrom also has three new full-line stores planned for the U.S. in 2015.
While full-line store growth will obviously pale in comparison to the growth of Rack, the full-line stores have significantly higher sales per store than Nordstrom Rack. As a result, it's easier to "move the needle" in terms of companywide revenue with a relatively small number of store openings.
Foolish bottom line
Nordstrom has differentiated itself within the department store space through its commitment to high-quality customer service, while the Rack has allowed it to expand its reach to younger and more value-oriented customers. The company has plenty of room to grow its footprint in the U.S., and Canada offers a smaller but still-promising market.
While growth has cooled off in 2013 relative to the pace set in 2012, I expect acceleration in the next two years due to a higher level of store openings and easier same-store sales comparisons. Nordstrom's solid long-term growth profile makes it one of the most attractive investment opportunities in the retail sector.
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The article Can Nordstrom Get Back to Faster Growth? originally appeared on Fool.com.Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. 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.
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