The Biggest Retailers Are Too Scared To Disclose This Data. But Nordstrom Just Did

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by: Wolf Richter
Summary

The largest brick-and-mortar retailers in the US don't disclose what portion of their revenues derive from e-commerce and from their brick-and-mortar stores.

Nordstrom is the exception. It started disclosing details on its online sales last year (kudos!). And it's an eye-opener for what is happening to brick-and-mortar sales - not only at its stores but also in the industry.

Online margins can be thin due to easy comparative shopping. But one-third of Nordstrom's revenues are already from its e-commerce sites, and growing, and are taking share away from its brick-and-mortar sales.

But if these large retailers fail to make the transition, and fail to invest vast amounts of money in it, they'll go the way of Toys 'R' Us, Payless, or Sears.

How its own online sales, now one-third of its total sales, eat its brick & mortar. But it's a matter of survival.

The largest brick-and-mortar retailers in the US don't disclose what portion of their revenues derive from e-commerce and from their brick-and-mortar stores. They don't because it would show just to what extent their brick-and-mortar stores are losing revenues even as their own e-commerce revenues are surging with big double-digit gains.

The top brick-and-mortar retailers have huge online operations: Walmart (NYSE:WMT), Home Depot (NYSE:HD), Best Buy (NYSE:BBY), and Macy's (NYSE:M) in that order are the fourth through seventh largest e-commerce sites in the US, behind only Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and Apple (NASDAQ:AAPL).

So they only disclose - or brag about - the massive percent increases in e-commerce revenues. But they do not disclose data that would allow us to calculate their e-commerce revenues in dollars, the dollar-increase in e-commerce revenues, the surging share of e-commerce in their total revenues, and the likely declining share of their brick-and-mortar revenues.

They even include e-commerce sales in "comparable sales" - sometimes falsely called same-store sales by the media. So when these "comparable sales" increase by 2%, it could be because e-commerce sales are booming even as brick-and-mortar sales are falling.

Nordstrom (NYSE:JWN) is the exception. It started disclosing details on its online sales last year (kudos!). And it's an eye-opener for what is happening to brick-and-mortar sales - not only at its stores but also in the industry.

One-third of Nordstrom revenues are already e-commerce.

In its earnings report yesterday for Q4 and its fiscal-year 2018 (ended on February 2, 2019), Nordstrom threw us some red meat about its "digital sales," as it calls them, allowing us to calculate its brick-and-mortar sales (the numbers below exclude "credit card revenues," such as interest paid by its card holders; roughly stable at around $100 million a quarter):

Q4 of fiscal 2018: digital sales = 33% of total sales of $4.38 billion = $1.45 billion; brick-and-mortar sales = $2.937 billion

Q4 of fiscal 2017: digital sales = 30% of total sales of $4.60 billion = $1.38 billion; brick-and-mortar sales = $3.22 billion

This shows three things for Q4 year-over-year:

  • Total sales: -4.5%
  • Digital sales: +5.1%
  • Brick-and-mortar sales: -8.7%

Fiscal-year 2018: digital sales = 30% of total sales of $15.48 billion = $4.64 billion; brick-and-mortar sales = $10.84 billion.

Fiscal-year 2017: digital sales = 27% of total sales of $15.137 billion = $4.09 billion; brick-and-mortar sales $11.05 billion.

This shows three things for the full fiscal-year 2018:

  • Total sales: +2.3%
  • Digital sales: +13.6%
  • Brick-and-mortar sales: -1.9%

The survival strategy.

In its audited annual report (10-K filing) for its fiscal-year 2017, the most recent available, Nordstrom spelled out the critical importance of investing in its online business and fulfillment infrastructure. In the section of "Risks due to Strategic and Operational Factors," it says:

Digital channels continue to facilitate comparison shopping, intensifying competition in the retail market. If we fail to adequately anticipate and respond to customer and market dynamics, we may lose market share or our ability to remain competitive, causing our sales and profitability to suffer. If we do not properly allocate our capital between the store and digital environment or between the full-price and off-price channels, or adjust the effectiveness and efficiency of our stores and digital channels, our overall sales and profitability could suffer.

Nordstrom gets it. Best Buy gets it. Macy's gets it. Walmart gets it. But private equity firms - those that years ago acquired Toys "R" Us, Payless ShoeSource, and other now bankrupt retailers, including Sun Capital which has pushed six retailers it owned into bankruptcy - didn't get it.

But the top retailers, outside of Nordstrom, are not disclosing to what extent their e-commerce sales are taking share from their brick-and-mortar sales. This is a scary thing for retailers because a large amount of money is involved in operating physical stores.

Nordstrom brags about its "combined physical and digital presence" and how that "represents a competitive advantage in offering customers a differentiated experience."

It's not really a "competitive advantage" since they're all doing it - Macy's, Best Buy, Walmart, the whole bunch is counting on it to give some purpose to their brick-and-mortar stores.

And here is an example from Best Buy as to why this "combined physical and digital presence" is only of limited benefit to physical stores, and less so going forward. This is just an example, but it plays out time after time:

I ordered a laptop from Best Buy. Among the delivery options was free shipping on orders of "$35 and up" or pick-up at the store, also free. But the store didn't have the laptop in inventory. It would have to be shipped to the store. And the day after it gets to the store, I could pick it up at the store.

So I ordered free shipping to the door and got it a day earlier than I could have by picking it up at the store. Why hassle with going to the store a day later - time and expense - when they bring it to the door a day earlier at the same cost? I don't know either.

No chance this shift to online will abate or reverse.

Even elderly internet-averse people have discovered online shopping. It's a godsend because it allows them to buy stuff without having to deal with the physical issues of going shopping, and of going from store to store until they find the thing they're looking for, if they can even find it at all. They can shop at their favorite retailers and buy their favorite brands backed by nearly unlimited inventories without having to leave the house.

And retailers that are planning to stick around are spending vast amounts of money building out their online operations and their e-commerce fulfillment infrastructure, including warehouses and delivery operations.

As Nordstrom pointed out, this is costly. And online margins can be thin due to easy comparative shopping. But one-third of Nordstrom's revenues are already from its e-commerce sites, and growing, and are taking share away from its brick-and-mortar sales. But if these large retailers fail to make the transition, and fail to invest vast amounts of money in it, they'll go the way of Toys 'R' Us, Payless, or Sears.

Mall landlords are painfully aware of it. "I prefer not to scare you at this point, okay. But it's something that we've been able to withstand," explained David Simon, CEO of Simon Property Group (NYSE:SPG), the largest mall REIT in the US. Read... What the CEO of America's Largest Mall REIT, Simon Property Group, Just Said about the Brick & Mortar Meltdown and How it's Trying to Manage It.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.