Nordstrom Family Weighs Taking Retailer Private
WSJ
Jun 09, 2017
Members of the family that founded Nordstrom Inc. are exploring the possibility of taking the retailer private, signaling they are ready to double down on the business at a time when many investors see a bleak future for the American department store.
The luxury department store operator said Thursday that six Nordstrom heirs are considering acquiring the 70% of the company they don’t already own. Assuming a typical takeover premium and including the company’s debt, such a deal could approach $10 billion.
The wealthy family, whose members still run the Seattle-based business, is seeking to take over a company whose shares have taken a beating even though it has fared better than many of its peers. Online sales account for about 20% of Nordstrom’s revenue and growth at the discount Nordstrom Rack chain has cushioned declines at the company’s full-price stores.
The Nordstrom family would be making a long-term bet on the future of retailing, said Allen Questrom, former CEO of Neiman Marcus Group Inc., Macy’s Inc. and J.C. Penney Co. “Sometimes you can’t make your numbers in the short term, but you want your brand to be around in 50 years,” he said.
RETAILERS IN TRANSITION
Shares in the company, which had slid 16% this year through Wednesday’s close, rose 10% to $44.63 on Thursday. As recently as 2015, the stock traded above $80 a share.
Investors have shown little faith in the health of department stores, as fewer shoppers visit malls and online rivals squeeze traditional retailers’ profits. Some chains such as Macy’s, J.C. Penney and Sears Holdings Corp. are closing hundreds of locations to stem losses.
But Nordstrom, which has fewer locations and is mostly in higher-end malls, is better positioned than others, analysts and investors say. It operates about 120 full-line stores and about 215 off-price Nordstrom Rack locations. Last year, a third of its $14.5 billion in revenue came from the discount business.
“Everyone is trying to determine who will be the survivors of the Amazon.com -led nuclear winter and I think Nordstrom is one of those survivors,” said Maxim Group analyst Tom Forte, noting shares of the company are undervalued by investors scared away by the woes of the wider sector.
Bill Smead, CEO of Smead Capital Management, which owns nearly half a million Nordstrom shares, said the company has been making all the right moves but the market isn’t giving it credit. “It’s not doing them any good to be a public company at the moment,” he said.
Mr. Smead, whose firm has roughly $2 billion under management, said he expects Nordstrom to be one of the retail survivors. “They will gain share as their competitors close stores.”
The company had a market value of $7.5 billion as of Thursday’s close and around $2 billion of net debt. Bankers said Thursday that given the family’s large stake, real-estate holdings and relative health of the business, the Nordstrom family wouldn’t have difficulty finding a financing partner for a buyout.
At $46 a share, the family would need to raise around $5.5 billion to fund a buyout, estimates Chuck Grom, analyst at Gordon Haskett Research. That would still leave the company with about a 28% lower ratio of debt to earnings than other recent retail buyouts.
Privately held retailers haven’t been spared the pain that has hit those in the public market. Nordstrom rival Neiman Marcus Group Ltd. is struggling with falling sales and more than $5 billion in debt from a leveraged buyout. J.Crew Group Inc., which was taken private in 2011, has posted 10 straight quarters of lower same-store sales and recently said its longtime leader Mickey Drexler would step aside as CEO.
Some analysts were skeptical of the idea of adding debt to a retailer given the underlying pressures. “We do not see the merits,” wrote Citi’s Paul Lejuez.
But Mr. Questrom drew a distinction between a founding family taking a company private and leveraged buyouts done by private-equity firms that typically pile on debt to juice returns and have a time horizon of five to seven years.
The Nordstrom family group includes the company’s biggest shareholder, Chairman Emeritus and former CEO Bruce Nordstrom, who owns 15.4% of the company and is a grandson of the founder. It also includes his sister, Anne Gittinger, who owns 9.2%, co-presidents Blake, Peter and Erik Nordstrom, as well as president of stores James Nordstrom.
The group said in a regulatory filing that it was exploring taking the company private “because of the changing dynamics in the retail environment.” It hasn’t made a proposal, though Nordstrom said its board has formed a special committee of independent directors and hired financial advisers to consider any offer.
Nordstrom had no further comment.
“They have always wanted to run this as a family business,” said Kathy Gersch, a former Nordstrom executive who now works at management firm Kotter International. She said such a takeover would “not be a standard leveraged buyout. It’s really the family buying back their company. It allows for a level of alignment that you don’t get in a standard buyout.”
Nordstrom was co-founded in 1901 by John W. Nordstrom, a Swedish immigrant who had joined the Klondike gold rush, and a local shoe salesman. The founders retired in the late 1920s and sold the business to Mr. Nordstrom’s sons. It sold only shoes until the 1960s and didn’t have a location on the East Coast until 1988.
A third generation, including Bruce Nordstrom, took over in the 1960s. The company added women’s apparel, sold shares to the public in 1971 and expanded the chain into a national player. Three of the founder’s great grandchildren are now co-presidents of the company.
Nordstrom has fended off threats to its business in part by moving quickly to expand its off-price chain and buying digital startups such as menswear site Trunk Club and flash-sales site HauteLook. While they have helped boost ecommerce sales, the investments have been costly. Last fall, Nordstrom wrote down the value of Trunk Club by nearly $200 million.
Nordstrom’s profits tumbled 41% to $354 million for its fiscal year ended in January, while sales inched up to $14.5 billion. Comparable sales fell 6.4% at physical full-line stores, but were largely offset by gains in e-commerce and Nordstrom Rack.
“We view Nordstrom as the strongest retailer in the department store space,” wrote Credit Suisse analyst Christian Buss, adding that the company is one of the few he expects to grow operating income over the next several years due to its e-commerce and off-price businesses. Mr. Buss said he believes the “core equity value” is $52 a share.
Last month, many of the big U.S. retailers reported dismal earnings. During its latest quarter, sales at Macy’s stores open at least a year slipped 5.2%. Kohl’s Corp. and Hudson’s Bay Co., which owns Saks Fifth Avenue and Lord & Taylor, also reported declines in same-store sales.
Just this week, Macy’s warned that profit margins were below its forecasts as it struggles to move unsold inventory. Sears announced plans to close another 72 Sears and Kmart locations.
Earlier this year, Nordstrom faced additional scrutiny after it decided to drop the fashion label of Ivanka Trump. President Donald Trump criticized the retailer on Twitter, saying his daughter was being treated unfairly. Ms Trump has taken a leave from her apparel and accessories company, though she retains a financial interest.
Nordstrom said it decided not to order items from Ms. Trump’s spring collection because of the brand’s performance, saying sales had steadily declined last year. During a call with analysts in February, Nordstrom executives said the President’s criticism had a negligible impact on the business.