By Neil Saunders
Nordstrom has opened its fiscal year with what can only be described as a dismal set of numbers. The modest total growth rate of 2.5% stands in marked contrast to the almost 10% growth the company was posting a year or so ago. And more significantly, for the first time in 25 quarters, overall underlying sales have entered negative territory; it was back in 2009 during the depths of the recession that they last turned red.
Most pressure came from the full-line U.S. department store division, where total sales fell by 6.9%, buffeted by a slip in same-store sales of 7.7%. As other retailers have already reported, demand during the quarter fell back with notably weak apparel sales. Nordstrom’s more fashion-focused offering did not prove immune to this trend, and despite discounting and promotional activity, the company was not able to stimulate the consumer into spending.
For much of retail over the first quarter of this year, consumers generally held back, were increasingly unwilling to buy at full price, shopped more selectively, and used online more and physical stores far less.
Overall, discounting and margin erosion and weak sales conspired to drive down net income growth, which plunged by a worrying 64% over the same period last year.
Nordstrom Rack, which has found significant success in serving the more price-conscious, fashion-savvy consumer, also seemed to run out of steam. The stores part of the business saw comparable sales decline by 0.8%, although ongoing physical expansion allowed total sales to grow by a comparatively robust 7.6%. The smaller online segment of the off-price business also did well with 41.8% growth.
These numbers are indicators of the trading trends that characterized much of retail over the first quarter of this year. Consumers generally held back, were increasingly unwilling to buy at full price, shopped more selectively, and used online more and physical stores far less.
While there is every reason to believe that the depth of these trends may be transitory, they do raise a question mark over Nordstrom’s expensive expansion plans. If new stores, especially full-line stores, are not going to deliver the returns that they once did, the investment cases are somewhat weakened. While it is likely that Nordstrom will want to see how the full fiscal year plays out, if the sales trend does not improve, the company may review its growth initiatives, especially for full-line department stores.
Despite the somewhat gloomy update, some areas of the business are performing well. Beauty is one of them, with generally favorable market trends and Nordstrom’s strong offering helping to boost sales. Young fashion is another area of growth, despite overall apparel being negative. Alone, however, these areas are not significant enough to make a massive difference to the top or bottom-line outcome—something that has left Nordstrom’s financials looking rather bleak.
Neil Saunders is CEO of research firm Conlumino.