Can Nordstrom Cut Its Way Out of a Rut?

Next week, Nordstrom is going to be back in the spotlight, announcing its fourth-quarter results. Over the last year, the retailer has bumped along, with comparable-store sales up just slightly for the first three quarters. The business is trying to reignite its selling spark with a wave of new Nordstrom Rack locations, but this activity is putting some pressure on the balance sheet.

Cutting to drive growth
Like a strip miner, Nordstrom is cutting deep into its bedrock in the hope of finding a rich new stream of revenue. The company just announced the closures of two locations, affecting close to 400 employees. Luckily, those employees have just about a year to find new positions -- the stores won't close until January 2015 -- at local Nordstrom and Nordstrom Rack locations.

Nordstrom's move comes as the company is increasing its spending on the Rack expansion. The company finished fiscal 2013 having added about 30 new Rack locations. The reason for the heavy dive into the Rack business is that those locations are currently generating huge sales growth compared to the classic Nordstrom locations.

In the third quarter of 2013, Nordstrom Rack comparable sales increased 3.7% over the same quarter in 2012 -- Nordstrom brand stores' comparable sale fell 0.7%. Competitors like Macy's and Neiman Marcus and forging ahead with comparable sales rising 3.5% and 5.7%, respectively, last quarter.

The cost question
Right now, Nordstrom is still in a strong position. Its earnings per share are still on the rise, and while its cash on hand has fallen over the last year it's not in a desperate position. The real motive behind the closures is probably that Nordstrom wants to shift the balance of the company to its faster-growing line.

Macy's made a similar move, closing five of its locations back in 2012 as it moved to find a better balance between its businesses. Nordstrom has more flexibility with its two brands, and even in the cities that Nordstrom is leaving, Nordstrom Rack will have a nearby presence.

In the end, the rebalancing should be good news for Nordstrom. Macy's investors have seen an S&P 500-beating return since the retailer announced its closures in 2012. Over that same period, Nordstrom has lagged behind the index. Look for stronger growth from Nordstrom starting next year and for more of this sort of shift to be announced in the company's earnings release next week.

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