Nordstrom Inc. (JWN, Financial) has improving capital return prospects after its 57% decline over the past year.
The high-end department store is investing in its website, reducing costs and is expanding the range of products it sells.
Website investment
The company is investing in its e-commerce capabilities to boost its financial performance. It is hoping to increase the speed of its distribution network on the West Coast to reduce the amount of time it takes to ship products to customers. This could catalyze its sales prospects since around 40% of its customers are located on the West Coast.
It also plans to launch a new website for its Canadian customers in fiscal 2020 that makes the process of shopping online faster and simpler. This could boost Nordstrom's profitability since the retailer has found that customers who purchase products through its website spend more on average than those who solely visit its stores.
Nordstrom plans to roll out its “buy online, pickup in store” service across a larger geographic area in fiscal 2020. The service recorded sales growth of 100% in the fourth quarter of fiscal 2019, becoming its most profitable segment.
Growth strategy
Nordstrom opened a flagship store in New York in October. The flagship store is expected to deliver $700 million in annual sales in the long run. It is also opening convenience stores in locations such as New York and Los Angeles. They could increase the size of its potential customer base and help to further grow its “buy online, pickup in store” business through offering its customers a wider range of collection locations.
The retailer increased its assortment of giftable items in fiscal 2019. They included a range of lower-priced items that deliver a higher rate of sales growth than the rest of its inventory. The business also provided customers with a wider range of offers and discounts, including shipping incentives and gift cards, that contributed to an improvement in customer satisfaction scores. This could strengthen the loyalty of its customers and help to widen the company’s economic moat.
Potential threats
The spread of the Covid-19 virus is likely to negatively impact Nordstrom’s financial performance in the short run. The company announced this week that it will temporarily close its stores in U.S. and Canada for at least two weeks. It will still operate its website and collection services, but its sales performance in upcoming weeks could be lower than in the prior-year period.
Additionally, the retailer imports around 30% of its own brands from China. Since factories in some parts of the country have been closed in recent weeks, it may lead to a supply shortage of some products.
In response, Nordstrom is aiming to reduce its costs to become more efficient. For example, in the fourth quarter it made $55 million in savings to produce a total of $225 million in savings for the full year. It expects to make further progress in becoming more productive and cutting its distribution costs to meet a target of $250 million in savings in 2021. This may catalyze its bottom line and help to offset a potential decline in the growth rate of its top line.
Outlook
Market analysts forecast Nordstrom will report a 2% increase in its earnings per share in fiscal 2020, followed by growth of 5% in 2021. Its price-earnings ratio of 6 suggests that it offers good value for money.
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Why DocuSign Has Upside Potential
- Why Vail Resorts Could Be Undervalued
- Why Signet Jewelers Has Recovery Potential
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
