Since the beginning of January, a slew of retailers have reported that sales trends improved significantly during the holiday season. Even Macy's (NYSE: M) -- which has reported comp sales declines for 11 straight quarters -- is poised to post comp sales growth in the fourth quarter.
On Tuesday, Nordstrom (NYSE: JWN) announced that it also got comp sales growing again at the end of 2017. However, its 1.2% comp sales increase during the November-December period wasn't that impressive in light of the big acceleration in retail spending over the holidays and Nordstrom's diversification away from mall-based full-line stores.
Breaking down Nordstrom's holiday season performance
Nordstrom faced easy year-over-year comparisons entering the fourth quarter -- at least on the full-price side of the company. A year ago, it posted a 0.9% comp sales decrease during Q4, consisting of a 2.9% comp sales decline in its full-line business, offset by a 4.3% gain in its off-price segment. Comp sales slid 2.1% at Macy's during the same period.
Nordstrom has been getting most of its growth from its off-price division. Image source: Nordstrom.
For the 2017 holiday season, full-price comp sales inched up 1%, while off-price comp sales rose 2.9%. Both figures represent modest improvements over the prior trend. The net result was comp sales growth of 1.2% for the full company: roughly in line with Macy's 1.1% increase.
In the full-line business, Nordstrom's 1% comp sales gain suggests that digital sales growth accelerated from the 13.5% increase achieved in the first three quarters of the year. However, in-store sales volumes probably continued to recede.
A similar scenario likely played out in the Nordstrom Rack division. Based on the company's recent trends, the 2.9% off-price comp sales increase probably consisted of a modest comp decline in Nordstrom Rack stores offset by at least 25% growth in off-price e-commerce sales.
In conjunction with its holiday sales update, Nordstrom narrowed its full-year EPS guidance range from $2.85-$2.95 to $2.90-$2.95. But even if it reaches the high end of this range, Nordstrom will post its third consecutive full-year EPS decline.
Nordstrom's profit has been declining steadily since 2014. Image source: Nordstrom.
Nordstrom Rack is still missing the mark
There's probably nothing Nordstrom can do about comp sales declines in its full-line stores. Weak mall traffic means retailers like Nordstrom and Macy's need to rely on e-commerce growth to offset soft trends in their physical stores.
By contrast, off-price retailers have continued posting meaningful comp sales growth in recent years, with little or no benefit from e-commerce. Nordstrom stands out for its focus on growing off-price e-commerce sales, even though that piece of the business is not profitable. It also stands out for routinely reporting comp sales declines in its physical Nordstrom Rack stores.
Nordstrom Rack represents Nordstrom's single biggest opportunity for improvement over the next few years. However, for this business segment to live up to its potential, management will have to focus on driving more traffic to stores -- at the expense of e-commerce sales, if necessary.
Will 2018 be better?
In 2018, Nordstrom should be able to return to EPS growth, if only because it will get a big boost from tax reform. However, for investors to get excited, the company will need to get its pre-tax profit growing again, too.
On the plus side, Nordstrom's investments in e-commerce growth, Canada, and the Trunk Club personal stylist business are starting to mature. This could enable these businesses to turn profitable soon (or at least lose less money). Nordstrom Canada is particularly well-positioned for profit improvement . Nordstrom is finally done opening new full-line stores there, the Canadian dollar has strengthened against the U.S. dollar, and higher oil prices could boost Canadian GDP growth -- all of which would support stronger profitability.
Still, the big question is whether Nordstrom Rack can achieve a renaissance. The division will be getting a new leader in March, albeit a familiar face: Geevy Thomas, who also headed up the Rack from 2010 until early 2017. Thomas will inherit a business facing easy year-over-year comparisons -- but without better execution, that won't necessarily mean better results.
Nordstrom has a lot of potential, but once again, it didn't live up to that potential during the holiday season. Perhaps 2018 will be the year its long-term growth strategy finally pays off.
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