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Nordstrom may have finally turned the corner

Brian Sozzi
Editor-at-Large

The long-awaited inflection point in Nordstrom’s (JWN) business may have begun in the third quarter.

And the luxury department store could thank its years of investments online and in services inside its stores — which executives have dubbed “generational investments” — for the turning of the corner. One of those investments include “local” stores now open in Los Angeles and New York City. These smaller stores have inventory specifically tailored to their markets and offer shoppers services such as online order pickup and clothing alterations. They also allow for the return of packages from other retailers.

Nordstrom’s president of stores Jamie Nordstrom tells Yahoo Finance more of these urban-centric stores will open in 2020, notably in Chicago and San Francisco. The goal with them is to not only drive traffic to the specific local store, but nearby larger Nordstrom stores and online.

Consider it the retail flywheel effect.

The company mostly credited these local locations for the turn in fortunes in the latest quarter.

Nordstrom’s third quarter net sales at its full-price stores fell 4.1%, improving from the year-to-date average drop of 5.3%. Sales at Nordstrom’s Rack off-price business rose 1.2% following two straight quarters of declines. Online sales increased 7%.

Importantly, after battling several quarters of struggles in women’s apparel and various investments Nordstrom’s bottom line metrics improved. Gross profit margins and operating margins gained 100 basis points and 50 basis points, respectively, in the third quarter versus a year ago. Executives also pointed to better quality inventory in the stores compared to earlier in the year.

Nordstrom’s stock has climbed about 14% since the company’s earnings hit the newswires on Nov. 21. But it’s still down about 30% over the past year.

“Nordstrom’s local market strategy already appears to be working,” says Morgan Stanley retail analyst Kimberly Greenberger.

NYC flagships

Another long-term bet for Nordstrom has been new flagships in its most important market of New York City.

In October, Nordstrom opened a seven-story, 320,000-square-foot space with an expansive collection of womenswear, accessories and beauty products. Services — designed to get New Yorkers into the store more frequently — include an upscale bar, Italian restaurant and places to get a blowout or Botox. Nordstrom says the customer response to the store has been strong.

The company opened a large men’s store in New York City in the spring of 2018.

NEW YORK, NEW YORK - FEBRUARY 28: Atmosphere during the Eton Creative Design Team event at Nordstrom Men's Store on February 28, 2019 in New York City. (Photo by Astrid Stawiarz/Getty Images for Nordstrom)

If Nordstrom could maintain its momentum with its local stores, online and its new New York flagships, investors may see a similar situation to the one that unfolded at discounter Target. After years of digital investments and store remodels, Target’s business has dramatically kicked into a higher gear in 2019. Shoppers have been sucked into the retailer’s ecosystem, creating a perfect storm of increasing sales and profits.

It will further help Nordstrom that with these generational investments in the rearview mirror, it forecasts capital expenditures to plunge to about 3% of sales in 2020 from a 6% run rate in recent years. That should alleviate pressure on margins and free up cash flow.

All of that is not lost on Jamie Nordstrom.

“We look at our business over the long-term, we have been around for 119 years now. So we are thinking about how do we create value and loyalty with customers over the long-term. That’s not about next quarter or next month, it’s about doing a good job for the customer and making them feel good. And when we do that, they come back to buy more from us and we see a lot of opportunities to do a better job with that,” Nordstrom said.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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