Nordstrom Slowly Revamps Its Full-Line Store Portfolio

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During the past five years, Nordstrom (NYSE: JWN) has invested aggressively in e-commerce and off-price stores, recognizing that consumer behavior is shifting rapidly. Nevertheless, the company's full-line stores remain its biggest revenue driver, accounting for nearly half of Nordstrom's sales.

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These full-line stores aren't going away anytime soon. Nordstrom sees its stores as a critical complement to its online business. Furthermore, all of its stores remain profitable on a "four-wall" basis.

That said, the company is continually refining its full-line store base to maximize its value. Some recent announcements from Nordstrom highlight its opportunities in this respect.

Closing stores that no longer fit

One way Nordstrom is adapting to the changing times is by shuttering some full-line stores. The company certainly doesn't plan mass store closures as Macy's (NYSE: M) undertook. There were nearly 800 Macy's stores operating a few years ago, before the company's downsizing initiative. Macy's clearly didn't need this big a physical footprint. By contrast, Nordstrom has a much more modest store base, with about 120 full-line locations.

Still, Nordstrom has a handful of stores that it doesn't need anymore. In the past two years, it has closed a pair of stores in Southern California and one in the D.C. metro area. The company recently announced plans to close another store in April, this time in Salem, Oregon.

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While the Salem store was profitable, at just 60,000 square feet, it was less than half the size of a typical full-line store. Nordstrom has several larger stores in Portland, less than an hour away, which can offer a much broader range of merchandise. Between these Portland stores and its e-commerce business, Nordstrom will be able to retain some of the revenue it had been generating in Salem.

Furthermore, closing the Salem store will free up working capital and enable Nordstrom to sell the store building, which has an assessed value of nearly $9 million. This move should more than offset the value of the modest profits that the store had been generating.

Relocating stores to higher-potential sites

A second way for Nordstrom to protect its franchise is to relocate stores from time to time, to ensure that they're in the most vibrant malls. For example, the company recently opened a new store at Westfield Century City in Los Angeles to replace an older store at Westside Pavilion, a nearby mall that's in need of a facelift. (Westside Pavilion's other anchor, Macy's, is set to close in the next few months.)

By the end of 2017, Nordstrom didn't have any more full-line store relocations planned for future years. However, earlier this month, it announced plans to relocate its Overland Park, Kansas, store to Country Club Plaza in Kansas City proper in 2021.

This relocation will move Nordstrom from a class-B mall to an "A" mall with significantly higher sales per square foot. The new store will be smaller, at 116,000 square feet, compared with about 200,000 square feet for the Overland Park location. This size seems to be the new sweet spot for Nordstrom, allowing it to carry a wide range of items without being overburdened with inventory.

Nordstrom is still opening a few stores, too

While most of Nordstrom's store growth is coming on the off-price side of the business, there are still a handful of opportunities for new full-line stores. In the past few years, Nordstrom has opened six stores in Canada, entering that market for the first time.

The company's next target is New York City. Last month, Nordstrom began hiring employees for its new men's store in Manhattan, which is set to open in April. The much larger main store has been under construction for several years and should be ready for the 2019 holiday season. Management expects this to become the chain's best-performing store.

Nordstrom will also open a new store in Norwalk, Connecticut, in 2019. This location will sit in the midst of an extremely wealthy area that doesn't have an upscale mall today. Bloomingdale's, Macy's luxury subsidiary, has signed up to be the other anchor for this new development.

Nordstrom's efforts to reposition its full-line store portfolio probably won't drive meaningful sales growth in its full-line stores. However, just stabilizing the sales and profitability of its full-line stores would be a big win for Nordstrom. After all, its e-commerce and off-price businesses offer abundant growth potential for the next decade and beyond.

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Adam Levine-Weinberg owns shares of Macy's and Nordstrom. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.