Bad Times For Big Retail

This past week saw some big shakeups for retail brands and investors alike. Nordstrom stock plummeted 20 percent after a Q3 sales report that fell far short of estimates, and Macy’s experienced a similar hiccup earlier in the week. These are just the latest in a string of major retail chains to experience weak sales in the months leading up to the holiday season, and as the reaction on Wall Street suggests, investor confidence in the strength of big retail is faltering as we head into the final months of 2015.

The Q3 report detailed a fall in profit to $81 million from $142 million just a year prior. And while sales rose 6.6 percent to $3.2 billion, same-store sales rose only 0.9 percent. While these numbers may not seem catastrophic, they sent shockwaves rippling through Wall Street, which was still recovering from Macy’s announcement the day prior of weak October sales. Even brands who had higher-than-expected Q3 sales reports, like JCPenney, felt the backlash as investor confidence in retail faltered.

The decline in traffic and subsequent sales for Nordstrom started in August when the retailer said it started to see a decrease in traffic. This decrease was across all stores, including its Nordstrom Rack brand, as well as online sales, according to The Wall Street Journal. The retailer refused to point to a specific segment or product that led the losses but said that it was persistent across geographic regions as well.

Nordstrom has downplayed the falter and pointed to several seemingly benign factors.

“It’s just a traffic thing,” stated President of Stores Jamie Nordstrom (hey, how’d he get that job?). “We’ve got less people buying clothes this quarter than we expected. And there’s really nothing else to point to.”

Nordstrom also pointed to the company’s continued ability to move products — a sticking point for Macy’s, who said it had been experiencing a backlog of inventory due in part to a warm fall season that decreased cold-weather clothing purchases.

While Nordstrom plans to hold to a steady discounting strategy during the holidays, Macy’s has suggested it would be implementing deep discounts in Q4 to try and liquidate overstocked merchandise and move more product that has been bogging down its store shelves. Nordstrom’s refusal to adopt a heavy discounting strategy may be in part due to its confidence in its high-value customers. In the Q3 report, Nordstrom stated that loyalty among its most valuable customers was strong.

However, dominance in the retail market by discount retail brands, like H&M, TJMaxx and Zara, is making it increasingly hard for mid-market brands, like Nordstrom and Macy’s, to compete. The move toward off-price brands started during the 2008 recession and has no signs of slowing yet. Since 2009, the off-price segment has experienced 40 percent growth, led by TJMaxx owner TJX Cos, and the sector shows no signs of losing steam. With the fast turnover of merchandise driven by the fast-fashion model and deep discounts the norm at off-price outlets, Nordstrom may need to bend on its discounting approach if the retail heavyweight wants to stay competitive this holiday season.

Another element that factors into the Nordstrom story is the recent sale of its credit card portfolio to Toronto-Dominion Bank (TD Bank). The deal, which was announced earlier in May but which was finalized on Oct. 1, transferred the retailer’s branded card portfolio, worth an estimated $2.2 billion, to TD Bank. According to Market Realist, the sale will help the retailer achieve “capital efficiency” by allocating the newly freed-up resources to more profitable growth opportunities and allowing the company to focus on its core retail business.

Nordstrom will continue to handle all marketing of the cards to consumers, as well as servicing the loyalty rewards program and maintaining an administrative role in servicing customer accounts. This will allow the retailer to have access to the wealth of data the cards and subsequent loyalty programs provide for how their customers shop and spend. The agreement, which has a seven-year term with an option to renew, will also leave the retailer splitting profits with TD Bank for the foreseeable future.

The close of the deal was especially good news to investors as it prompted a special dividends and share repurchasing announcement by the company. On Oct. 2, Nordstrom announced that it plans to disburse net proceeds of $1.8 billion through a special cash dividend of $4.85 per share. A reported $325 million of the proceeds from the sale will go toward debt reduction, while another $35 million to $45 million has been earmarked for transaction costs.

It’s certainly been a rollercoaster ride for investors in the retail space over the past few weeks, with many unanswered questions about the strength of the retail market and the forecast for the holiday season. But while Nordstrom has not shown great confidence in a holiday rebound, the company has avoided giving too much legitimacy to those who are trying to paint a “doom-and-gloom” portrait of the state of retail.

If its response to the latest hiccup is any indication, its strategy is to play it cool … at least for now.