Nordstrom, Inc.(NYSE:JWN) has proved to be a very lucrative investment for those who placed trust in it. Nordstrom distinguishes itself from most other companies by focusing on the lowest denominator, customer service. The company has achieved excellent results, while staying simple and consistent. Such performance makes it, at least, a bit easier for an investor to foresee the success of the company. There are several reasons why Nordstrom is a good investment. Here they are:
Assurance of Good Customer Service:
Nordstrom's greatest advantage is its clearly distinguishable customer service. Unlike customers of other businesses, customers of Nordstrom can bank on the fact that they will receive high quality customer service every time they visit the store. Certainty in quality is an essential component. An unusually good experience at a generally mediocre store holds little value for customers. However, an above average experience on every occasion tends to build a special bond based on trust. For instance, people only refer those products and services to their friends that they know are certain to work as expected, every time. In such advice, what matters more is the consistency of the quality, and not as much the superiority over other products and services.
By offering consistently good service, Nordstrom has cornered the market. A company in such a position can leverage the trust placed in it to widen its line of products. Nordstrom, due to its myriad advantages, is in such a unique position. It seems highly unlikely that this policy of providing consistently good customer service will not last as long as the current management of the firm.
Presence of Founding Family:
Managements have different motives. Many a time it is short term gain, which is pursued at the cost of long term health of the company. Although the experience and the ability of senior management vary amongst different companies, another very important factor for success is usually in short supply. That factor is sincerity. The founding family running Nordstrom is sincere about the progress it wants Nordstrom to make. And that sincerity can be expressed regarding the long term objectives. This sincerity guides the company towards longer term advantages such as consistently good customer service.
It is hard to predict Nordstrom's success in monetary terms, as is the case for any company. However, the honest long term motivations of the management of the company bode very well for the company's chances.
Long Term Tenure of the Founding Family:
The Nordstrom brothers running the company are relatively young, and can be expected to be around for the next 2 decades. The oldest, Blake Nordstrom, CEO at Nordstrom, is 52 years of age. Peter Nordstrom, the Executive Vice President and President of Merchandising, is 51. And Erik Nordstrom, the Executive Vice President and President of Stores, is 49. The brothers are very focused on the success of the company, and seem to appreciate their positions at the company. Save for an unusual circumstance, the company is going to be run by the brothers for the foreseeable future.
Such long tenures are rare at well established public companies. This gives Nordstrom a huge human resource advantage over its competitors.
Newer product lines:
A company always grows its business due to its chief competitive advantage, whether durable or not. Once that competitive advantage is analyzed carefully, it can easily signal newer opportunities. These new business propositions may even be in a new industry, but the risk of loss remains low. For instance, Wal-Mart (NYSE:WMT) clearly understands its advantage of low cost products and services. This has allowed it to expand its line of products and services. As a consequence of such strategy, the customers know what to expect at Walmart on every visit. They do not expect high quality customer service, but lower prices across the aisles. Nordstrom finds itself in a similar position. It has its customers' loyalty and has the opportunity to branch out into other customer service businesses. In these businesses, Nordstrom's chief focus would remain its high quality customer service.
Such liberties are only available to a handful of businesses across the country. These businesses have earned these opportunities due to the underlying promise of maintaining their competitive advantages in all ventures.
Competition faced by Nordstrom:
Each year, the competition faced by Nordstrom becomes less and less fierce. With each passing year, Nordstrom strengthens its competitive position by maintaining its advantages, while its competitors find it even harder to catch up. Two of its competitors are Saks, Inc. (NYSE:SKS) and Neiman Marcus (privately held). The revenue growth figures for Neiman Marcus include results for (Neiman Marcus®, Bergdorf Goodman®, Horchow®, Last Call® and CUSP®), all held by the Neiman Marcus Group.
All three companies operate in a highly competitive industry, and are doing relatively well. However, Saks and Neiman Marcus lose out on the dedicated management that Nordstrom enjoys. As a result, Nordstrom offers more financial and operational certainty to its investors, while on the other hand, the future of Saks and Neiman Marcus is uncertain. Neiman Marcus plans to hold an IPO soon, and will return to the public markets after eight years. Saks, on the other hand, may go private or merge with another entity. In May, Saks employed Goldman Saks to advise on a sale of the company. Since then, the shares of Saks are up 33%, in anticipation of a deal. Whether or not Saks is purchased by a private buyer, the future of the company would remain uncertain.
|Revenue Growth||Saks||Nordstrom||Neiman Marcus|
The profits at Nordstrom have tripled in the last decade. Due to the strength in the company's business model, Nordstrom should continue to see increasing profits in the future.
In addition, the PE ratio at Nordstrom is relatively low, at 17.10. Saks has a PE ratio of 46.19, and the S&P 500 PE ratio is 19.5. It is hard to fathom why a quality company like Nordstrom would have a PE ratio lower than the market, but the trend is prevalent across the retail industry.
Nordstrom benefits from its founding family's efforts to make it profitable over the long haul. To do so, they have taken the hardest road possible, and have made Nordstrom a Mecca for customer service. Although not everything can be known about future events at Nordstrom, it can be said with reasonable belief that the Nordstrom family is likely to stay at the helm, and the focus on customer service is going to be sustained. If the aforementioned happens, it would be very difficult for an investor not to do well financially, solely from an investment in Nordstrom. We suggest that one hold this stock in a diversified portfolio.