Nordstrom says big bets poised to pay off with growing profits ahead

Nordstrom executives say the high-end Seattle clothing retailer is weathering the storm roiling their industry, and they forecast a long-term upturn in sales growth and profit margin after a four-year run of significant capital investments.

The company is targeting annual sales growth of 3 to 4 percent over the next four years, with the majority of that growth stemming from the company’s so-called “generational” investments.

The projections, in an investor presentation in Los Angeles on Tuesday, come 13 months after the Nordstrom family publicly launched their ultimately ill-fated attempt to take the company private. Co-president Blake Nordstrom declined to answer a question on the family’s thought process. “We’re 100 percent focused on being the best public company we can be,” he said.

In the intervening year, Nordstrom has faced questions about when the payoff will come from a series of large-scale investments – in new markets such as Canada and New York City, in acquisitions such as Trunk Club, and in new technologies to better integrate increasingly sophisticated online sales and services with the operations of its 122 full-line department stores and 239 discount Nordstrom Rack locations.

The answer, executives said in their presentations Tuesday, is starting now.

“We’re at an inflection point here,” co-president Peter Nordstrom said, adding, “This is not an outline for survival. … What we really have here is a blueprint for success.”

The broader retail context is indeed one of survival, as Nordstrom competitors and other national retailers have closed thousands of physical locations, many of which no longer make sense for shoppers who would rather buy online.

Nordstrom leaders have sought to set the company apart from that fray. The company has no plans for any large-scale revision of its store fleet. “All of our stores are cash-flow positive,” co-president Erik Nordstrom said.

Executives said the company’s pre-tax profit is expected to be up 5 to 6 percent a year over the 2017-2022 period, pointing to expanding profit margins. Those margins are not expected to reach the double-digit levels they have in the past, but chief financial officer Anne Bramman said Nordstrom now can achieve “superior returns to shareholders” with a more capital-efficient model. She said the company intends to return about $1 billion a year over the next five years to shareholders through dividends and share repurchases, about the same pace as during the last five years.

Nordstrom shares closed down about 2.7 percent Tuesday, at $52.09.

As Nordstrom’s latest wave of investments in online sales and services comes to fruition, the retailer’s costs for online and in-store sales are coming in to balance. Shipping costs for an online purchase are roughly equal to commissions and costs paid to in-store salespeople for an equivalent sale.

“We are largely indifferent of where our next sale comes from,” Erik Nordstrom said.

Nordstrom’s online and physical distribution systems are also unifying, starting with a new distribution center planned to serve the Los Angeles market. Instead of a 50-year-old supply chain to move merchandise to stores and a separate one to begun 20 years ago to fulfill online orders, Nordstrom’s new model is for a single warehouse to serve both functions.

L.A. is Nordstrom’s largest single market, and also the first place it’s trying this unified strategy that extends from the supply chain to stores and online sales. An app, in testing now and planned for release later this year, brings together many of the new online capabilities the company has built in the last two years.

Chief digital officer Ken Worzel said the app takes a shopper from browsing styles to selecting specific items — with or without the help of a personal stylist, augmented by machine learning to suggest complementary pieces – to automated scheduling of an in-store fitting inside a connected dressing room to ordering and mobile pay.

“We really are seeing the benefits of knitting these experiences together to serve customers whenever, wherever and however they want to be served,” Worzel said.

Many of those services can be had in the company’s “Local” stores – growing to three in the L.A. area this fall – where customers can pick up orders, get alterations and meet with stylists, among other services.

Nordstrom plans to bring a similar unified market concept to New York City in 2019, when it is due to open a flagship women’s store there to complement the men’s store it opened in the spring.