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Bear Of The Day: Nordstrom (JWN)

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This pandemic may mark the end of department stores as we know it. Department retailers have been on the decline for the past year or so, with the new generation of shoppers having little patience for these enormous and cumbersome stores. Consumers have turned their backs on antiquated department stores and moved towards online shopping, which illustrates the values of the evolving consumer: ease & convenience.

Nordstrom (JWN - Free Report) is one such department store chain that is experiencing the retail apocalypse firsthand. This aging enterprise experienced a (2.2%) sales decline and an over (14%) drop in profits during 2019, while the broader retail market had its strongest year ever. E-commerce is driving the retail sector growth today, and as of Q4 2019, it makes up 11.4% of total retail sales, which is substantially higher than the 4.1% a decade ago. Below is a graph created by the St. Louis Fed’s economic research (FRED) illustrating the rise of online shopping.

Nordstrom has been vigorously attempting to pivot its platform to cater to the digital shopper, but it may be too little too late.

The biggest issue with department stores like Nordstrom is the massive amount of overhead associated with operating such gigantic stores. The business must not only pay for the annual leases, which can be considerable in high-traffic areas, but they have to pay the salaries of the sizable number of people that work at each location. On top of that, these stores are forced to discount their prices to increase foot-traffic. Over 1/3 of Nordstrom’s total 2019 revenues were items sold at a discount, up from the prior year. All of this has been weighing heavily on department store margins.

This is compared to the e-commerce space, which can automate a lot of its warehouse work and achieving expanding margins with scale. Retailers like Macy’s (M - Free Report) , JCPenney JCP, and Nordstrom rue the days they didn’t see Amazon (AMZN - Free Report) as a threat.

Financial Concerns

JWN is highly leveraged with debt-to-capital of 82% and 2019 debt-to-earnings ratio of 5.4x. The department store is working with paper-thin net margins of only 3.2% and cannot afford for those to fall below 0.

Nordstrom is a non-essential business, and its stores have been forced to shut down across the nation. 

This pandemic may be the straw that broke the camel’s back. JWN only has $853 million in cash & equivalents on the balance sheet and over $2 billion in debts and obligations due within the year (shown below from JWN’s 2019 10K).

The company has been somewhat successful in its transition to a digital platform, with 33% of its total sales being achieved digitally. Unfortunately, the highly leveraged balance sheet and significant overhead might be Nordstrom’s undoing. JWN suspended its dividend, and Fitch Ratings just dropped its credit rating to BBB, toeing junk bond territory.

Take Away

This pandemic is pushing retailers to the edge of their balance sheets and marks an inflection point in the retail apocalypse. Only the strong will survive the global demand halt. Department stores like Macy’s and JC Penny are on the verge of bankruptcy, and Nordstrom’s balance sheet is deteriorating. JWN is now relying on its digital sales to keep its operations afloat.

I do not recommend shorting JWN shares or betting against them with puts, but I would stay away. The uncertainty for department stores is high, and I wouldn’t risk any of my portfolio with these shares. JWN has lost over 55% of its value so far this year, and there may still be more downside risk as the economic shutdown extends.

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