Looking to Control Their Destiny, Nordstroms Weigh Buyout

Looking to Control Their Destiny, Nordstroms Weigh Buyout
By Evan Clark. Source: WWD.

Nordstrom Inc. might have found a possible escape route away from the madness of the public markets — but it’s not one many other retailers will be able to take.

As the Nordstrom family explores the possibility of buying back full control of the company cofounded by John W. Nordstrom in 1901, they find themselves in an unusual position.

In an extremely precarious retail world, Nordstrom stands out for its relatively solid performance, although declining foot traffic and competition from the likes of Amazon have taken their toll on the chain as they have on everyone in the fashion sector. The company, which went public in 1971, also enjoys a positioning that has it in step with broader changes in the market — namely its embrace of a digital transformation and a laser-focus on customer service and the in-store experience.

To thrive or even survive in the future, Nordstrom and many of its competitors might well have to take a longer-term view than public companies usually can and make investments that can hurt earnings in the short run, but ultimately shape the future. That will be a transformation that would likely take plenty of time and money and would be easiest to actually pull off away from the glare of stock investors.

Greg Portell, lead partner in A.T. Kearney’s retail practice, compared the pains of the changes that are needed at retail to those of adolescence.

“You never want to be that awkward teenager in public,” Portell said. “The transformation is starting and that’s really what retailers are facing today — making dramatic changes that aren’t necessarily going to be profit-making in the next quarter, but are necessary.”

He said the Nordstroms would likely experiment with the store and mobile as they chase the future.

“Here you have retailers buying retail,” Portell said of the potential takeover. “It’s a much different situation than a banker buying a retailer and then trying to manage it as an asset. They’re not trying to fix something, they’re trying to extend and deepen something. Their commitment to high-quality retail experiences is admirable. And it’s something that’s sorely missing in much of retailing today. So if you were going to bet on a team of owners to say, ‘OK, who’s going to reimagine the positive retail experience,’ the Nordstroms would be high on that list of names that you would place that bet on.”

If the family does succeed in taking Nordstrom private, they will have reeled in the biggest retail deal in the market since Federated Department Stores and May Co. merged for $11.7 billion in 2005 to form the modern Macy’s Inc.

“This is a strong signal for the retail M&A deal market,” said David Shiffman, managing director at Peter J. Solomon Co.

But department stores are out of favor, both on Wall Street and the consumer’s mind.

To continue on and figure out its own path forward, the Nordstorm board has formed a special committee comprised of the independent directors to explore the possibility of going private. Centerview Partners LLC has been retained to serve as its financial adviser.

The family members involved include copresidents Blake W. Nordstrom, Peter E. Nordstrom and Erik B. Nordstrom, and president of stores James [Jamie] F. Nordstrom, as well as chairman emeritus Bruce A. Nordstrom and Anne E. Gittinger.

The Nordstroms were not available for comment, but together the group holds 51.8 million shares, or 31.2 percent of the company.

It’s the people who own the other two-thirds of the company — the general investor who is looking for significant growth to push the value of their investment higher — who make life hard for publicly held retailers.

And if the Nordstrom family is to succeed in buying the 68.8 percent of the company they don’t already own, they’re going to have to convince banks or other lenders to commit — and significantly — to the idea that the company can continue to flourish.

Investors are betting the Nordstroms, who are working with financial adviser Moelis & Co., get a deal done. Shares of the retailer jumped up as much as 18.3 percent to $47.90 before the stock settled and closed up 10.3 percent to $44.63, leaving the firm with a market capitalization of $7.4 billion.

The boost for Nordstrom did not lift the sector and the S&P 500 Retailing Industry Group slipped 0.4 percent to 1,518.37 on a relatively flat day for the market.

Prior to the deal, Nordstrom had an enterprise value of 5.2 times its earnings before interest, taxes, deprecation and amortization. That valuation, which is very cheap for a well-run company, opened up the opportunity for the family to make its move. But experts said even if the family commits their entire stake to the endeavor and raises all the money they can, they still might need to bring in a partner of some sort.

Gordon Haskett analyst Chuck Grom noted: “With the Nordstrom family owning about 30 percent of the outstanding shares already — they essentially satisfy the typical ‘equity component’ funded via private equity firms in most [leveraged buyout] transactions, which also raises the odds of a deal getting done. In terms of the rough math, at about $46, the group would need to raise approximately $5.45 billion of additional debt to fund the takeout, which would imply an EBITDA multiple of 6.8 times. Indeed this is about 28 percent lower than average retail LBO of 9.4 times (since 2006), which could entice others (i.e., Hudson’s Bay, etc.) to get involved with Nordstrom now officially ‘in play.’”

Although an outside player could come in and challenge the Nordstroms for control, most experts see the family as having a strong hand, although any deal would ultimately leave the company with more debt on its books and that could become troublesome down the line should the business turn south.

If the Nordstroms are able to raise the money and get a deal done, it will be a sign of confidence for a beleaguered sector that has seen little good news of late. The problem is that few other firms find themselves in a similar position.

Going private and staying private under a unified management team and ownership that sees department stores as a business and not as an exercise in financial engineering is something that the Dillard family could also do at Dillard’s Inc. But without concentrated ownership, Macy’s, J.C. Penney Co. Inc. or Kohl’s Corp. are more likely to find themselves slogging through the public market or being bought by a big-money investor looking for an exit in a few years. The latter could leave them in the same state as Neiman Marcus Group, which finds itself mired in debt after two successive private equity buyouts and no easy way out.

“You can’t run an apparel retail business as a public company without getting periodically destroyed,” said Michael Gould, the former chairman and chief executive officer of Bloomingdale’s. “You can’t guess right in every quarter. You miss by a penny what the Street estimates are and you are going to get killed. You take extra markdowns in December because you are too high on inventory, you get whacked for the quarter though you are clean [with inventory] for the year.…If Nordstrom can do this, I take my hat off to them. Long term, they will run a better business.”

Gould said: “The department store model is broken. The way buyers look at the [apparel] market, anything that has a risk to it is anathema. So there is no risk to business. When there is no risk, there’s no newness. That’s why the lease model is better, there’s a flow of merchandise. The model is broken because buyers are focused on what’s basic, safe, and so driven by the deal. The first thing they say when they walk into a showroom is, ‘What’s the deal?’”

Colleen Kelly, ceo of the Alex Apparel Group Inc., a key supplier of better-priced social occasion dresses and separates to Nordstrom and other stores, didn’t expect that vendors would see much change if the family takes complete control of the company.

“Maybe buyers would be more experimental and willing to test more things, without worrying about short-term results, the failures or successes,” Kelly said. “In my experience when you are a wholesaler that had gone public to private, you gain the opportunity to execute on strategies outside the public eye, to do things without panicking whether the stock price will go up or down. You can experiment and not be so driven by comp and EBITDA numbers. It’s really good.”

Kathy Gersch, executive vice president for strategy execution and change management at Kotter International consulting, said “I think it could be good for Nordstrom,” and enable the company to invest more for the long-term future of the business and how it evolves.

Gersch, a former Nordstrom vice president, noted that as a family-run company that’s been publicly held, the interests of the family and those of the many shareholders may not always be aligned. But going private would keep the family-run firm focused and aligned in its strategies and direction.

For the last couple of years, Nordstrom has been rolling out a new store design at key locations to advance the shopping experience. The format includes Space, a shop showcasing emerging designer labels, and pumping up designer presentations, though what remains most prominent is the breadth of merchandise and price points — from Prada, Céline and Lanvin to Jessica Simpson, Sam Edelman and Topshop. It’s an appeal that’s wider than the offering at Saks or Neiman’s and distinct from Macy’s, Holt Renfrew and Hudson’s Bay. It’s also a strategic advantage.

The 116-year-old company has always been associated with tradition and old-fashioned values like “the customer always comes first,” but has stealthily become one of the most innovative retailers. Years before the competition, Nordstrom got a handle on what drives retail success in the 21st century — the convergence of e-commerce, mobile and store operations to support each other. The company started ramping up the Rack outlet chain long before Saks, Neiman’s and Macy’s jumped on the off-price opportunity, and began offering free shipping before the competition did. There has also been a string of out-of-the-box acquisitions in brick-and-mortar and the Internet, including Jeffrey stores, HauteLook and Trunk Club, giving Nordstrom new capabilities and growth, though Trunk Club has proven disappointing.

Nordstrom’s technology spree and omnichannel initiatives sometimes were to the detriment of the bottom line, but as of late, executives have said they were keeping the tech spending in check, and shifting more emphasis back on profitability.

Last year, and through the first quarter of this year, Nordstrom outpaced its competitors. Unlike most fashion retailers, Nordstrom cited women’s apparel as a top performer, along with beauty. The younger customer-focused departments in women’s apparel continued to do well, reflecting strength in denim and collaborations with new and emerging limited distribution brands, such as Madewell. The company was lifted by gains at Rack, and there were “continuous improvements to its operating model.”

In 2016, net earnings fell to $354 million from $600 million, with earnings before interest and taxes of $1.1 billion representing a decrease of $210 million relative to last year, primarily due to asset impairment charges and other non-operational items in 2016 and 2015. Excluding these items, retail earnings before interest and taxes decreased $55 million, primarily due to higher technology and fulfillment costs supporting multichannel growth. Total sales for the year rose 2.9 percent to $14.5 billion. Comparable sales decreased 0.4 percent.

Aside from possibly going private, another major project on the Nordstroms’ plate is the construction of the 367,000-square-foot Manhattan flagship, an assemblage of sites and Nordstrom’s most complicated and costliest construction project ever, estimated at north of $500 million.

The flagship, located on West 57th Street between Seventh Avenue and Broadway, will be the retailer’s first full-line department store in New York City, consisting of a 320,000-square-foot women’s store, expected to open in fall 2019, and a 47,000-square-foot men’s store, scheduled for a spring 2018 opening.

If the Nordstroms succeed in taking back the reins, the New York retail scene could offer a first look at what the fourth generation can accomplish when they are left to follow their own instincts and are unfettered by Wall Street just downtown.

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