In the midst of a tough retail environment that has seen department stores closing locations and clothing companies filing for bankruptcy, members of the Nordstrom family said Thursday they’re considering taking the Seattle-based fashion retailer private.
The move comes at a time when retailers generally are struggling to cope with consumers’ growing penchant for shopping online as well as general shifts in what they spend their money on. Nordstrom has done better than most retailers in adapting, but sales at its big full-line stores have suffered.
The Nordstrom family members – company Co-Presidents Blake Nordstrom, Peter Nordstrom and Erik Nordstrom; President of Stores James Nordstrom; Chairman Emeritus Bruce Nordstrom; and Anne Gittinger, granddaughter of Nordstrom co-founder John Nordstrom – have not made any proposal yet, the company said.
The group owns 51.8 million shares, representing about 31.2 percent of the company’s outstanding stock, it said in a regulatory filing Thursday.
The company, which was founded as a shoe store in 1901 and went public in 1978, currently has a market capitalization – the value of all shares – of about $7.5 billion at the end of Thursday’s trading.
That means that to buy up the 69 percent of shares that they don’t own, the family group and any allies would likely need more than $5 billion – and that’s without any additional premium over the current price that stockholders would likely require.
Those stockholders got a nice short-term bump as Nordstrom shares climbed after the pre-market news. The stock shot up 15 percent shortly after the announcement Thursday morning and closed the day up 10 percent at $44.63. Nordstrom shares have traded between $35.01 and $62.82 in the past year.
The company’s board of directors has formed a special committee of its independent members to represent the best interests of other shareholders in considering any possible transaction.
The committee could also solicit proposals from other outside entities, though the Nordstrom family indicated in the regulatory filing that it had “no interest in a sale of their shares” to a third party or voting for an alternative transaction.
Nordstrom declined to make executives available for comment Thursday.
The shifting retail climate triggered the family’s move, Nordstrom said Thursday in a filing with the Securities and Exchange Commission.
“Because of the changing dynamics in the retail environment, the Group is evaluating whether the long-term interests of the Issuer are better served as a privately held company,” its filing said.
That “probably means the business needs some restructuring and it would probably be best to do that outside the public eye,” said Neil Stern, analyst with retail consulting firm McMillanDoolittle. “It’s hard for a retailer to turn around when everyone’s hanging on their quarterly earnings statements. Going private buys you some leeway.”
The company now operates 354 stores in 40 states, including 122 full-line stores in the U.S., Canada and Puerto Rico; 221 Nordstrom Rack stores; two Jeffrey boutiques; and two clearance stores. It also operates online through Nordstrom.com, Nordstromrack.com and HauteLook.
Going private would give the Nordstrom family more breathing room to look at the various components of its business – including e-commerce, full-line stores, and its off-price Rack brand – and perhaps make moves that would not be as well received on Wall Street.
For instance, the company has invested heavily in growing its e-commerce business. That’s paid off: E-commerce now makes up nearly a quarter of the company’s sales, up from 8 percent in 2010.
But it’s also come with heavy expenses to build out the infrastructure, with the company saying earlier this year that the profitability of online has finally started to cross over to a higher margin than in-store sales.
As a privately owned company, management may decide to offer, say, less generous free shipping or returns, which might slow e-commerce sales growth in the short run but boost profit margins long-term, Stern said.
Going private could also give the company more latitude in deciding what to do with underperforming stores. Unlike some of its competitors, which have closed dozens of stores recently, Nordstrom – which has far fewer stores than to begin with than, say, Macy’s – has only closed a handful of stores here and there over the years.
But Nordstrom management said during last quarter’s earnings call that it doesn’t look just at the sales volume of any given store, but also how that store might drive online sales and vice versa – a stance that may not please Wall Street investors.
Company executives also said during the call that it no longer made sense to judge the performance of the company by looking at such measures as comparable sales for full-line stores – a key metric that Wall Street loves, tracking how much sales grew or declined in stores open at least a year.
Nordstrom’s comparable sales for its full-line stores have fallen for seven consecutive quarters, as customers increasingly shop online and shift some spending to experiences rather than clothing.
“Maybe you’re slowing down growth. Maybe your sales go negative for a while while you do this,” said Stern. “Wall Street would hate this but in the private world it would be acceptable.”
Indeed, Wall Street’s emphasis on short-term, quarter-by-quarter gains has led to a number of publicly traded retailers increasingly offering promotional or discounted goods to boost sales – something that undermines the business in the longer term, said Neil Saunders, managing director of GlobalData Retail.
“Investors are very short term and that’s not always helpful to businesses,” Saunders said.
Nordstrom’s shares took a beating recently for the dismal performance of its peers, even as its own sales and profits have not fared nearly as badly. In its most recent quarter, sales were up 3 percent and profit up 37 percent.
Analysts at Credit Suisse described Nordstrom as “the strongest retailer in the department store space,” though the investment bank said in a research note Thursday that it was difficult to determine whether the company will actually end up going private.
To go private, which would mean the company’s shares no longer trade on the stock market and its financial results are no longer subject to public scrutiny, the Nordstrom family would first need to find financing.
A group of analysts led by Michael Binetti at UBS Investment Bank estimated that the family would need to raise $4-$4.5 billion in outside capital, assuming a final stock price of $50 a share and backers from the private equity world contributing $1.5 billion of the total buyout.
“We’re cautious about a department store’s ability to secure a bid of this magnitude given the structural headwinds facing the sector today,” the UBS analysts wrote in a research note Thursday. “Five years ago, Best Buy went down a similar path looking for $2.5-$3.0B and was unable to secure the full funding.”
Even if the Nordstrom family group secures the funding, there’s a question of “how much that debt will hamper their ability to grow their business and finance their move into e-commerce,” said Stern of McMillanDoolittle.
Recent leveraged buyouts present some warning signs. J. Crew (which took on about $2.1 billion in debt after its buyout) and Neiman Marcus ($4.9 billion in debt) went private in leveraged buyouts, hoping to re-emerge with initial public offerings once the businesses grw stronger – but the IPOs never happened. And other leveraged buyouts including Claire’s, Gymboree and True Religion have been foundering, according to a Bloomberg News report.
Should the Nordstrom family line up the financing it needs, it can make a formal offer for the company’s special committee of independent board members to consider, said Jarrad Harford, professor of finance at the University of Washington’s Foster School of Business.
If the committee decides to recommend the Nordstrom family’s proposal, the Nordstrom family could make a tender offer for the shares, effectively asking shareholders to sell their shares to the family. However, if enough shareholders decide to hold on to their shares, the tender offer fails, and the Nordstrom family could withdraw its bid or sweeten the pot.
Even if a tender offer receives enough support to go through, there would likely still be lawsuits by dissenting shareholders over whether the price was fair, said Harford.
Another option would be for the Nordstrom family to form a private entity and enter into a merger agreement with Nordstrom, which would require majority approval from non-Nordstrom family shareholders. If approved, the Nordstrom company would be merged into the private entity and non-family shareholders would be cashed-out at the offer price.
Although sometimes a going-private offer triggers rival bids from outsiders, that’s unlikely here.
“Given the name on the door, and the Nordstrom family’s 30+% ownership of the stock today, as well as their stated intention of acquiring 100% of the common stock of the company, we would argue that a competing bid is unlikely,” analysts at Guggenheim Securities said in a research note Thursday.
“This is not the family cashing out,” Stern said.
“Sometimes you see families going private and selling to third-party investors and taking the money out.” But this move by the Nordstrom family “looks like the family wants to keep control of its legacy, of its business,” Stern said.
“It’s a signal they have confidence in the business. But it needs to be managed differently than it’s being managed right now as a public company.”
Janet I. Tu: 206-464-2272 or firstname.lastname@example.org. On Twitter @janettu.
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