Nordstrom early Friday collected a couple of downgrades, from UBS and Guggenheim analysts, after announcing on Thursday that members of the Nordstrom family are exploring the possibility of taking the company private.
But some analysts argue the move makes sense for a retailer that has faltered in recent quarters, but isn't piled with a lot of debt and has operations with value buried deep within the wider company. A private restructuring would likely take Nordstrom three to five years, Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive.
Others told Retail Dive that going private also affords the company time and space that can be difficult to come by as public investors clamor for growth on a quarterly basis. “[Wall] Street expects positive results quarter by quarter, which even in the best of times is often unrealistic,” Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, told Retail Dive. “Let alone times when the industry at large is in turmoil, or a specific retail company is in some form of turnaround or transition. Going private, assuming it did not entail taking on a crushing level of debt, may very well be the best thing that could happen to Nordstrom.”
Nordstrom is particularly well suited to this move, with members of the founding family still in its executive ranks, a flagship department store fleet that hasn’t over-expanded the way Macy’s has, and e-commerce and off-price operations that lend the company added value, analysts told Retail Dive.
“Nordstrom, which started as a shoe store and evolved into a premium apparel house, never was a full-line department store and has gained market share over that same 30 year period” that saw full-line department stores, including Sears, J.C. Penney and Macy's, steadily losing market share, Nick Egelanian, retail analyst and president of retail development consultants SiteWorks International, told Retail Dive. “However, the Nordstrom brand is now segmented into the mature 120 department stores business and the faster growing Nordstrom Rack brand. Taking the company private may be just a first step in separating the very valuable but now slow-growth premium department store brand from the higher growth discount Rack brand to create greater overall value.”
Davidowitz said Nordstrom is “brilliantly” positioned to go private because of the loyalty of their customers, their commitment to customer service, the Nordstrom Rack business (established more than four decades ago) and their “very powerful” online business.
“They have many more Rack stores than they have Nordstrom stores,” he said. “Unlike Macy’s, who was in bed on sleeping pills when this whole off-price retail took off, Nordstrom did it and is producing superb results. How do you get value for the Nordstrom shareholders as long as Nordstrom Rack is buried? If you want to spin off — Rack might be valued more than the whole Nordstrom — one reason to go private and do a restructuring is you can’t do these things when you’re a public company because there’s too much criticism. You don’t have to worry about earnings and you don’t have to impress anybody. You do what you have to do and come back.”
It’s a viable option for a company with funds available and light at the end of the tunnel, Michael Brown, a partner in the retail practice of global strategy and management consulting firm A.T. Kearney, told Retail Dive in an email. Nordstrom's recent sales troubles and investors' attendant wariness could actually help. “Going private when share prices are low and then public again, after investments have been made and benefits are being realized, can have a positive return for a company doing this,” he said. “All retailers are under pressure from a number of fronts. On-line price transparency, consumers’ desire for off-price goods, millennials' affinity to spend on experiences as opposed to goods and a decreased number of shoppers in their prime spending years, as baby boomers age out of the market and millennials have not hit their peak spending years. These are macro factors affecting everyone.”
In fact, it’s a long game only in its second inning, Davidowitz said. “I think everybody recognizes we’re in a time of historic change. You’ve got to make all kinds of changes to your business, and you need to do it at the right pace,” he said. “Even though the family’s in control, if you’re a public company, you still have obligations to the other shareholders. So if some guy comes in and is able to get control of 4% of your stock, he can make a lot of noise. You’d be surprised, even though they’re in control, it can get very messy. This way, you’re insulted from the madness and you can focus on your business. You don’t have to worry about your shareholders or private equity buying up your shares and harassing you. You avoid that and you stick to what you know needs to be done.”
One issue for the family to avoid, however, is becoming over-insulated, Kathy Gersch, EVP at strategy execution and change management firm Kotter International and a former Nordstrom executive, told Retail Dive. “As they go private and as they become internally-focused, they’ll want to bring in outside points of view,” she said. “You don’t always want to think the family knows best. They’ll want to balance that in a different way, with an external board and other ways to bring in that external view.”