Nordstrom Inc. is considering going private.
The Nordstrom family has formed a group to explore the possibility of pursuing a “going private transaction” involving the acquisition by the group of 100 percent of the outstanding shares of common stock of the company. The group has not yet made a proposal to the company regarding any such transaction.
Nordstrom has been among the nation’s strongest performing department store companies, yet the company’s stock price has been dragged down by the rest of the sector. After Thursday’s announcement on the company considering taking itself private, Nordstrom stock jumped 16 percent, or $6.33, to $40.48.
The family already owns just over 30 percent of the stock.
The board of directors has formed a special committee comprised of the independent directors to explore the possibility of going private.
Centerview Partners LLC has been retained to serve as its financial adviser and Sidley Austin LLP will serve as legal counsel.
The family members involved include copresidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, and president of stores James [Jamie] F. Nordstrom, as well as chairman emeritus Bruce A. Nordstrom, and Anne E. Gittinger.
On June 7, 2017, the Nordstroms, including Bruce, Blake, Erik, James and Pete beneficially-owned 51,830,957 shares, or 31.2 percent of the outstanding shares. The group is separately filing a schedule 13D to report its beneficial ownership of shares.
The Seattle-based Nordstrom has a market capitalization of $7.59 billion. According to Thomson Reuters, insiders hold 26.4 percent of the stock, and institutions hold 56.6 percent of the stock.
The Nordstroms were not available for comment.
Michael Gould, the former chairman and chief executive of Bloomingdale’s, emphasized the monthly and quarterly pressures Wall Street puts on public companies and how that constrains risk-taking. “You can’t run an apparel retail business as a public company without getting periodically destroyed,” said Gould. “You can’t guess right in every quarter. You miss by a penny what the street estimates are and you are going to get killed. You take extra markdowns in December because you are too high on inventory, you get whacked for the quarter though you are clean [with inventory] for the year…If Nordstrom can do this, I take my hat off to them. Long term, they will run a better business.
Gould said, “The department store model is broken. The way buyers look at the [apparel] market, anything that has a risk to it is anathema. So there is no risk to business. When there is no risk, there’s no newness. That’s why the lease model is better, there’s a flow of merchandise. The model is broken because buyers are focused on what’s basic, safe, and so driven by the deal. The first thing they say when they walk into a showroom is “what’s the deal?”
“I don’t think from a vendor perspective, we will see much change. Maybe buyers would be more experimental and willing to test more things, without worrying about short term results, the failures or successes,” said Colleen Kelly, chief executive officer of the Alex Apparel Group Inc., a key supplier of better-priced social occasion dresses and separates to Nordstrom and other stores. “In my experience when you are a wholesaler that had gone public to private, you gain the opportunity to execute on strategies outside the public eye, to do things without panicking whether the stock price will go up or down. You can experiment and not be so driven by comp and EBITDA numbers. It’s really good.”
Kathy Gersch, executive vice president for strategy execution and change management at Kotter International consulting, said “I think it could be good for Nordstrom,” and enable the company to invest more for the long-term future of the business and how it evolves. Gersch, a former Nordstrom vice president, noted that as a family-run company that’s been publicly held, the interests of the family and those of the many shareholders may not always be aligned. But going private would keep the family-run firm focused and aligned in its strategies and direction.
From the vendor perspective, “I don’t immediately see a change,” Gersch said. “They have very good vendor relationships. I don’t think this would affect it.” Other sources indicated that the Nordstrom group could offer shareholders a 15 to 20 percent premium on their shares, particularly since the stock price is low. “You may have the debt, but you’re not looking to have an exit program which is what the private equity guys would do.”
According to a research note from Gordon Haskett analyst Chuck Grom, “With the Nordstrom family owning about 30 percent of the outstanding shares already – they essentially satisfy the typical “equity component” funded via private equity firms in most LBO transactions, which also raises the odds of a deal getting done. In terms of the rough math, at about $46, the group would need to raise approximately $5.45 billion of additional debt to fund the takeout, which would imply an EBITDA multiple of 6.8x. Indeed this is about 28 percent lower than average retail LBO of 9.4x (since 2006), which could entice others (i.e. P/E, Hudson Bay, etc.) to get involved with Nordstrom now officially ‘in play.’” Grom added that within the department store arena, “We think Dillard’s is the most likely candidate to follow a similar path given the high degree of family ownership.”
Nordstrom is among America’s most highly-regarded stores, with an ability to provide better service, easier shopping, and presenting merchandise in a way that goes over well with both customers and vendors. The Nordstrom team seems to know how to buy and sell the goods better than the competition. It’s also been ahead of the pack in terms of innovation, testing and bringing new concepts to the selling floor, including striking exclusive deals to sell Madewell and Topshop, two brands where wholesaling hadn’t been part of the business model.
For the last couple of years, Nordstrom has been rolling out a new store design at key locations to advance the shopping experience. The format includes Space, a shop showcasing emerging designer labels, and pumping up designer presentations, though what remains most prominent is the breadth of merchandise and price points — from Prada, Céline and Lanvin to Jessica Simpson, Sam Edelman and Topshop. It’s an appeal that’s wider than the offering at Saks or Neiman’s and distinct from Macy’s, Holt Renfrew and Hudson’s Bay. It’s also a strategic advantage.
The 116-year-old company has always been associated with tradition and old-fashioned values like “the customer always comes first,” but has stealthily become one of the most innovative retailers. Years before the competition, Nordstrom got a handle on what drives retail success in the 21st century — the convergence of e-commerce, mobile and store operations to support each other. The company started ramping up the Rack outlet chain long before Saks Fifth Avenue, Neiman Marcus and Macy’s Inc. jumped on the off-price opportunity, and began offering free shipping before the competition did. There has also been a string of out-of-the-box acquisitions in brick-and-mortar and the Internet, including Jeffrey stores, HauteLook and Trunk Club, giving Nordstrom new capabilities and growth,though Trunk Club has proven disappointing.
Nordstrom’s technology spree and omnichannel initiatives sometimes were to the detriment of the bottom line, but as of late, executives have said they were keeping the tech spend in check, and shifting more emphasis back on profitability.
Last February, Market Force Information released a survey of 10,714 adults in all four U.S. census regions indicating that for the fifth year in a row, Nordstrom ranked as the nation’s favorite fashion retailer, winning on service, ease of shopping, ambience and for being a high-end brand with value. Dillard’s ranked second, being seen as the best for creating a look and enabling customers to find correct sizes. TJ Maxx ranked third and was called out for merchandise selection.
Last year, and through the first quarter of this year, Nordstrom outperformed its competitors. Unlike most fashion retailers, Nordstrom cited women’s apparel as a top performer, along with beauty. The younger customer-focused departments in women’s apparel continued to outperform, reflecting strength in denim and collaborations with new and emerging limited distribution brands, such as Madewell. The company was lifted by gains at its Rack off-price division, which in recent years rapidly expanded, and there were “continuous improvements to its operating model.”
Last year, net earnings fell to $354 million from $600 million, with earnings before interest and taxes of $1.1 billion representing a decrease of $210 million relative to last year, primarily due to asset impairment charges and other non-operational items in 2016 and 2015. Excluding these items, retail EBIT decreased $55 million, primarily due to higher technology and fulfillment costs supporting multi-channel growth. Total sales for the year rose 2.9 percent to $14.5 billion. Comparable sales decreased 0.4 percent.
In the first quarter of this year, earnings met expectations, though sales fell short. Net earnings rose 37 percent to $63 million. Total sales came to $3.3 billion for the first quarter, a 2.7 percent increase compared with net sales of $3.2 billion during the year-ago period. Comparable sales for the quarter decreased 0.8 percent.
Nordstrom expects 2017 earnings per diluted share of $2.75 to $3.00, a net sales increase of 3 to 4 percent and about flat comparable sales.
Aside from possibly going private, another major investment is the construction of the 367,000-square-foot Manhattan flagship, an assemblage of sites and Nordstrom’s most complicated and costliest construction project, estimated at north of $500 million.
The Nordstrom flagship, located on West 57th Street between Seventh Avenue and Broadway, will be the retailer’s first full-line department store in the New York City, consisting of a 320,000-square-foot women’s store, expected to open fall 2019, and a separate 47,000-square-foot men’s store, scheduled for a spring 2018 opening. The men’s store opens ahead of the women’s store because it’s retrofitting an existing space, while the women’s store is being built from the ground up.
Manhattan is considered Nordstrom’s sixth flagship and second largest store in the 123-unit department store chain. The downtown Seattle flagship, at 383,000 square feet, is the largest Nordstrom store. The San Francisco Centre, Michigan Avenue Chicago, Toronto Eaton Centre and Vancouver locations are also considered flagships.