Why Nordstrom Will Succeed In Canada

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 |  About: Nordstrom Inc. (JWN)
by: Karoline Porcello

Summary

Nordstrom's strong financial performance over the past few years enables expansion.

Nordstrom has learned from Target's mistakes and adjusted its strategy accordingly.

The luxury market is currently growing in Canada.

Nordstrom's (NYSE:JWN) Canadian expansion has sparked controversy after Target's (NYSE:TGT) recent blow from their own expansion. However, Nordstrom is in a different position that should enable them to not only succeed, but thrive.

1. Strong Financials

Nordstrom has recorded a strong financial performance in the past few years. After a 6.3% decrease in sales in FY 2009, the company has rebounded with an increase in revenues at a compound annual growth rate of 12% from FY 2011 to FY 2013. The increase in revenues is attributed to increased sales both in store and through e-commerce, and a 7.7% increase in operating profit in FY 2013.

A cautionary aspect of Nordstrom's financials is their high debt-to-equity ratio. The ratio is currently at 1.5, which is much higher than that of competitors. For example, Saks, Inc. (NYSE:SKS) boasts a debt-to-equity ratio of 0.3. The high leverage results in increased interest expense and lower financial flexibility. However, with Nordstrom's trend of increasing sales, it should be able to successfully offset it.

2. Application of Lessons From Target

Target suffered quite a blow from its Canadian expansion. The retailer posted a $1 billion loss in Canada last year. Nordstrom has taken notice. The company is learning lessons from Target's struggles to ensure they understand how to best serve Canadians. Two lessons they are applying are as follows:

Starting small -- Nordstrom plans to open its first store in the fall with four stores following in subsequent years, vs. Target's 124 stores in less than a year. This will provide Nordstrom with more of an opportunity to learn from and adapt to its Canadian customer.

Creating a special experience -- Target's Canadian customers complained about the lack of luster in Target Canada stores. To avoid disappointing the customer, Nordstrom pushed back the launch of its off-price division, Nordstrom Rack, from next year to 2017. They want to focus on blowing the consumer away with the full, special experience.

3. Luxury Market Growth

Current demand for luxury retailers in Canada is strong. The demand is fueling massive expansion projects at shopping malls across the country. In Vancouver, the Pacific and Oakridge Centers are adding 578,000 square feet and 373,000 square feet, respectively. In Toronto, top-tier malls Yorkdale and Sherway Gardens are undergoing multimillion-dollar expansions. They are investing to shift consumer mentality into thinking of shopping centers as "destinations."

The top 2% of the population is accredited with "doing fairly well by and large" (Ross Moore, CCBRE Group's head researcher). This sector of the population is taking their disposable income to the shopping centers, which is sparking the current growth. Canada is an attractive market right now because there are more citizens who have disposable income. Findings in study conducted by WSL/Strategic Retail found that 64% of Canadians have disposable income, while only 50% of Americans do.

The combination of Nordstrom's strong financials, takeaways from Target's struggles, and the luxury market growth in Canada all provide Nordstrom with a great opportunity for expansion into the Canadian market. I anticipate a strong ROI come fall with the first store opening.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.