While a fair number of old-retail giants have figured out ways to navigate through the new-retail world, we shouldn't let their successes make us think that it's easy. Consider Nordstrom (NYSE: JWN), which missed earnings expectations and cut guidance due to slowing sales of its full-priced women's clothing and self-inflicted wounds to its loyalty program.
In this segment from MarketFoolery, host Mac Greer and analysts Emily Flippen and Jason Moser talk about the last quarter's issues, the company's troubles in predicting what will sell, the broader shift in our work wardrobes, and more.
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This video was recorded on May 22, 2019.
Mac Greer: I'm just so excited to get all this stuff home, I can't take time to have a hot dog there. OK, let's move on to Nordstrom. Wow, really struggling here! Shares falling more than 8%. Weaker-than-expected earnings, and Nordstrom cutting its full-year forecast. Now, Emily, among the culprits here, problems with Nordstrom's loyalty program. That seems bad. And, slowing sales of full-priced women's clothing, which, I understand from my limited experience at Nordstrom, that is an important part of the product mix.
Emily Flippen: It is an important part. This 57% decline in earnings year over year is definitely representing that. What I think is interesting is that management chalked it up to executional misses, essentially acknowledging the fact that they made a lot of mistakes, one being the changes to the loyalty program. They didn't send out flyers. It turns out, a decent number of people relied on these flyers to remind them to go into the Nordstrom stores.
Greer: I love that! So, a victory for snail mail. Turns out, people still want something mailed to them.
Flippen: Or, a loss to Nordstrom, which might tell you something about their core customer, right, if they're still relying on these snail mail catalogs, I guess you could say, to remind them to shop at Nordstrom. But, they also said there's a poor merchandise mix. That goes into women's clothing. This is what we've been citing as a main concern -- at least, I've been citing as a main concern -- with a lot of traditional retailers, especially clothing retailers. They have to order, purchase, and stock inventory, which is essentially trying to predict what people are going to want to buy. And they keep losing out to the TJ Maxx and Burlington companies of the world, because they don't care what inventory they have. They stock a little bit of everything. It might be off-season, it might not be the newest thing, but that doesn't matter to them. Nordstrom needs to predict trends and fashion and demands. It's in part what killed J.C. Penney, poor merchandising management. So, Nordstrom, this quarter to me says, the main thing they're struggling with is expertise and merchandising.
Jason Moser: It's a very difficult space. We talk about it all the time, sustainable improvement in the specialty retail fashion style investments, it's just really difficult. Emily really hit the nail on the head there. They have to just be really good about predicting fashion. And then, not only predicting the fashion, but predicting how much of it they're going to sell. You look at a lot of these retailers' balance sheets, and when you see those inventory numbers start getting little bit inflated, that's a double whammy. Not only is the inventory becoming inflated, but as time goes on, it becomes even more obsolete. So they essentially just end up writing all of that stuff off, or selling it to these other stores in the value chain for next to nothing. When they're succeeding, yeah, the market recognizes that. But very difficult to succeed on a sustainable basis.
Greer: And it seems like one of the trends -- I'm going to posit this as my fancy pants theory here -- as a society, especially in the U.S., we've become much more casual over the last 20 years.
Moser: Oh, for sure!
Greer: Men, women. You don't see near as many business suits. There's not near as much of the need for that nicer formal or semiformal clothing. Doesn't that hurt Nordstrom, when people are gravitating to athleisure wear and they're wearing jeans to the office?
Flippen: Yeah, I definitely think so. I was having this conversation with a couple of friends this weekend, about the different clothes we wear to work. And at no point have I felt compelled to spend a few hundred dollars on a work suit or something. And that's not just because I work at The Motley Fool, where we're very casual. My friends as well, who have more professional jobs -- not to say The Motley Fool's not professional! But, a more professional setting job. And they do the same thing. It's much more casual. It's hard to compel people to spend that much money. And if somebody is spending that much money on clothes, there are so many different ways to buy and consume those clothes that don't involve shopping at a place like Nordstrom.
Moser: Yeah, just watch Joseph A. Bank and Men's Wearhouse. That's a good example, those two essentially combined. I think they've got a long road ahead as well, because that's all they really sell, is that formal attire and banker suits and whatnot. You just don't see people dressing the same way these days.
Greer: So, when you look at Nordstrom, the stock, shares down more than 40% over the past five years. What does it take to right the ship?
Flippen: That's a good question. I think they put a lot of money into things like Trunk Club, trying to reach a different demographic, make it more accessible. But they've been sucking wind on Trunk Club, that being their style delivery service, very similar to Stitch Fix. They haven't really found a way to monetize that. I think the main issue is that ultimately, they're still a department store. Department stores are very expensive to run. And they haven't really made changes to the way that they procure clothes. So I think it's going to take an entire business overhaul or potentially a cultural overhaul for the United States to really save this company.
Greer: Any chance they get acquired?
Moser: I mean, certainly possible. But, you look at businesses when they're having problems, it's either a fundamental problem with the business or it's a problem in the market that they actually serve. I think that's where Nordstrom really has a problem. The market that they serve has fundamentally changed over the past 20 years. It's going to be very difficult for them to pivot because they essentially have to lose their identity in the process.
Greer: But you're saying, if they become something completely different, [laughs] they have a chance?
Moser: [laughs] That could be a solution!
Greer: It's never a good sign!
Moser: Throw up a few Nordstrom frozen yogurt stands across the country, everybody loves froyo.
Flippen: Planet Fitness is looking for real estate, I hear. Maybe Nordstrom development should just be selling everything to Planet Fitness.
Greer: I like it!
Emily Flippen has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Mac Greer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends SFIX. The Motley Fool recommends Nordstrom, PLNT, and TJX. The Motley Fool has a disclosure policy.