Nordstrom Walks the Gauntlet Twice

Dec.12.08 | About: Nordstrom Inc. (JWN)

Nordstrom (NYSE:JWN) gets to walk the gauntlet twice in this awful retail market. Once, with its declining sales. And they've been abysmal. November same store sales were down 15.9% with overall sales down 12%. Net profit margins have dropped from 8.4% in Q3 2007 to 3.9% in Q3 2008. Falling same store sales are worsening: August down 7.9%, September down 9.6%, October down 15%. Nordstrom's Christmas sales face big declines, the period in which the company makes the lion's share of its money.

Take away: Out of every buck of merchandise sold, Nordstrom makes less than 4 cents.

That's not all. Nordstrom has to walk through the gauntlet a second time. Many of Nordstrom's sales are transacted using its credit cards. Last year, Nordstrom brought back its credit card business onto its balance sheet in contrast to other retailers (Target (NYSE:TGT), Kohl's (NYSE:KSS), Neiman Marcus) which were jettisoning theirs. The Nordstrom credit business makes up 54% of its current asset balance. It's listed as total net receivables. At $1.951 billion, it is a jaw dropping 70% of market cap.

As one would expect, the credit card business is not doing all that well. Out of $1.951 billion, $105 million is labeled "doubtful" (from SEC documents, Q3 2008). This quarter, bad debt alone was $50 million with the credit card business losing $17 million. Nordstrom believes that its credit card write-offs are lower than other companies. However, its receivables occupy a far greater part of its business than its competitors: Macy's (NYSE:M) share of receivables/market cap is 9.8% and J.C. Penney's (NYSE:JCP) is 7.3%, while Nordstrom's is 70%.

Take away: Sales booked on its credit card are not safe. The small profit gets eaten by credit card write-offs.

When Nordstrom sells its goods, it gets 3.9% in profit after taxes. The money it books with its credit card must await payment by holders who are increasingly having trouble paying their bills. Expect this story to worsen. Bad debt expenses will become greater as the debtors fail to pay. Already booked sales may turn to dust as Nordstrom is forced to walk the gauntlet again and again.

Disclosure: Author holds a short position in JWN