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Nordstrom isn't going private anytime soon, so it needs to focus on these 4 things

Lauren Thomas

Nordstrom will meet with investors Tuesday in Los Angeles to share its vision for how it moves forward as a public company.

Earlier this year, the Nordstrom family fought to take the company private, as it was looking to make critical investments outside of the public eye. The deal talks fell through , however, when a price couldn't be agreed upon.

For now, Nordstrom faces similar scrutiny as Macy's and J.C. Penney . The retailer's challenge is to make the investments needed to compete against Amazon , while continuing to keep shareholders happy — no easy task as more shopping heads online and mall traffic dwindles.

The Seattle-based department store chain has long been considered the best of its peer group — for touting a healthier, slimmer real estate footprint, inking deals with popular apparel brands like Topshop for stores within its stores, and running a lucrative off-price business, Nordstrom Rack.

But there are growing concerns that even best-in-class Nordstrom can't keep up. During the latest quarter, the company's online business blossomed, but same-store sales growth at both its full-line and off-price locations wasn't as strong as expected.

Nordstrom shares are up nearly 13 percent since the start of the year. Rivals such as Macy's have seen larger gains in recent months. In Macy's case, the stock is up 31 percent year to date. Partly, this reflects how beaten down department store stocks were in 2017. But finding growth could be a challenge for Nordstrom.

Earlier this month, Cowen & Co. lowered its rating on Nordstrom shares to market perform from outperform, and dropped its price target to $51 from $56. Nordstrom shares closed Monday at $53.52.

Cowen analyst Oliver Chen has warned that the retailer may need to close up to 10 percent of its physical stores. He's also concerned about the Rack division losing momentum and struggling to compete with the likes of TJ Maxx and Ross Stores .

Here are four areas investors are focused on:


Real estate strategy

With 122 full-line stores throughout the U.S. and Canada, and 239 Nordstrom Rack locations, Nordstrom has a much smaller footprint than most of its peers. Macy's, for example, has more than 800 stores, including its off-price Backstage division, Bluemercury and Bloomingdale's. Penny has more than 860 stores. Kohl's has more than 1,100.

Still, even Nordstrom likely will need to shutter some locations in the coming years. The company announced one closure — a rare move for the retailer — earlier this year, in Salem, Oregon. But it also opened up its first shop dedicated to men . Located in Manhattan, the men's store will sit next to the first full-line Nordstrom department store for women, set to open in the city next year.

A better strategy for Nordstrom moving forward could be to focus on its best-performing locations in key markets like New York, San Francisco, Chicago and Los Angeles. Shuttering less-profitable stores would allow the company to pour money into renovating older stores.

It would also give Nordstrom more resources to open additional Nordstrom Local stores . The company opened its first late last year on Melrose Avenue in Los Angles. On Monday, it said it would add more locations in Los Angeles and expand to New York. These stores are smaller and focused on service and providing shoppers with an experience. On-site tailoring, a nail salon and pick-up kiosks for online orders are among the offerings.

Other retailers including Kohl's and Target are experimenting with smaller-format stores as well.

Growth at Nordstrom Rack

Nordstrom Rack has been a bright spot for the department store chain for years, consecutively growing sales as those at Nordstrom's full-line stores soften. From 2016 to 2017, for example, net sales at Nordstrom Rack climbed to $4.1 billion from $3.8 billion, while net sales at full-line locations fell to $6.95 billion from $7.2 billion.

In the first quarter of fiscal 2018, however, same-store sales at Nordstrom's off-price stores only grew 0.4 percent, compared with an increase of 2.3 percent a year prior. Management said on a conference call that sales on NordstromRack.com were still very strong, despite a slowdown at the stores, which according to the company was due to weakness in more "seasonal categories."

Nordstrom's competitors in the off-price category include Macy's Backstage, TJ Maxx, Ross Stores, Burlington, Saks Off Fifth and Neiman Marcus Last Call. Analysts worry that Nordstrom won't be able to compete with TJ Maxx and Ross in particular, which have seen stronger same-store sales growth of late and have many more locations.

This year, Nordstrom opened its first Rack store in Canada and is looking to open more than a dozen locations across the country, hopefully finding new pockets of growth where markets in the U.S. have stagnated.

The real test will come when Nordstrom reports its earnings and investors see whether Rack's slower first-quarter growth was a fluke, or if the business is really in trouble.

Tie-ups with Allbirds and others

Nordstrom has had a knack for partnering with strong brands. A recent example is Silicon Valley cult brand Allbirds, which makes shoes from sustainable materials such as merino wool and eucalyptus tree fiber. The e-commerce company will open pop-up shops within a handful of Nordstrom's stores.

Nordstrom's new men's store is also home to brands like Bonobos and Shinola, which were digital retailers first.

If Nordstrom can become the go-to retail partner for these up-and-coming players, it could drive more traffic to stores because shoppers often can't find Allbirds sneakers, for example, elsewhere. These digitally native brands tout selling primarily directly to consumers, but Nordstrom has been able to entice some companies to move into its stores by giving theme prime shelf space, collaborative marketing campaigns and the chance to sell alongside more established players like Ralph Lauren and Coach .

Industry analysts expert Nordstrom to do more of this, especially as the company grows in New York, where many digital-first retailers are based today. The strategy could help keep Nordstrom relevant and ahead of its peers. It can be a huge traffic driver and offers an element of exclusivity.

Growth online

In 2017, roughly one-quarter of Nordstrom's sales came from online. According to the company, that percentage should balloon to 50 within the next few years. But how will Nordstrom will get there?

Most retailers by now understand that making investments in e-commerce can weigh on a business' margins, at least in the near term. The cost of winning over a shopper online is much higher than it is at the store.

"The retail environment is changing faster than ever," Brian Gill, technology senior vice president at Nordstrom, said earlier this year . "We need to invest in technologies that will enable us to deliver on those qualities and better serve customers in a digitally-connected world."

Nordstrom in March announced its acquisition of two digital start-ups — BevyUp and MessageYes — to help bolster its online business. BevyUp encourages shoppers to share information with each other and browse items together online, while MessageYes offers brands the opportunity to text their customers, leveraging artificial intelligence and integrated payments.

Analysts expect department store chains will be proactive by either buying smaller businesses outright to improve their own, or investing in new start-ups to work closely with them. Nordstrom could benefit from making more strategic acquisitions or investments like this.

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