Investors edgy as profit expected to fall 30%
Being a top internet retailer has gotten to be pricey for Nordstrom jwn .
The upscale department store on Thursday gave a disappointing forecast for the first half of the new fiscal year, including the expectation that profit per share will fall 30%, and announced it would pull back on tech spending growth.
Nordstrom now gets 20% of sales online, up from 8% just five years ago. But that growth, which has included new distribution facilities, computerized systems and equipping stores to help fill online orders way before it became the industry standard, has come at a cost — painful at a time sales are wobbly. So the retailer’s executives announced a plan to rein that it in.
This year, Nordstrom plans to spend $300 million on tech and e-commerce. A big number to be sure, but the same amount as last year, when those investments rose 35%.
And Chief Financial Officer Mike Koppel told Wall Street analysts on a conference call that Nordstrom would cut back on the number of tech-related projects to focus on those with the biggest potential payoff.
“With our investments to gain market share, along with the changing business model, expenses in recent years have grown faster than sales,” Koppel said. And anxiety about the once-high flying Nordstrom’s shrinking profits and declining sales at its department stores sent shares down 8%. (They are down about 45% from their 52-week high.) In November, when the retailer reported similarly disappointing results, shares fell 20% in one day. For a long time, investors seemed to treat Nordstrom as they did Amazon.com amzn : willing to see profits squeezed if market share grows. But as the stock slide shows, investors have reached the limits of their patience.
Koppel didn’t get specific about what cuts could be, but he did say Nordstrom would be “refining” its online assortment to focus on profitable items, apparently hinting it may limit online availability to items selling well online. Nordstrom is looking into ways of being more efficient in how it ships orders to reduce costs. (That could possibly mean trying to avoid sending different components of an order in separate pieces.)
It’s hard to argue that Nordstrom has had enormous success online: Nordstrom.com sales rose 11% last quarter, and online revenues on its discount web sites (nordstromrack.com and hautelook.com) rose 50%.
But the retailer must be hoping this does not hurt the brightest part of its business. Comparable sales fell 3.2% at its department stores, dropping for the 2nd quarter in a row. Meanwhile at the Rack, comparable sales fell 3%, and questions remained as to whether it is opening too many of those discount stores too quickly. Still, Nordstrom said it is still on pace to do $20 billion in overall sales by 2020 (they hit $14.1 billion in 2015).
Koppel and his colleagues expect this tough retail environment to persist. (HBC’s Saks Fifth Avenue and Neiman Marcus each reported declining same-store sales at their department stores in their most recent quarters.)
“We remain cautious because of the continued promotional environment,” Koppel said.