Nordstrom’s (JWN) bottom line has been under pressure due to the investments it’s been making in its growth strategies, including its expansion in Canada. However, these investments are expected to deliver long-term benefits. In its fiscal 2016, which ended on January 28, 2017, Nordstrom’s capital expenditure (capex) was $0.85 billion.
Over the 2017–2021 period, Nordstrom’s planned capex is $3.4 billion, or ~4.0% of its sales. The company has toned down its capex compared to the five-year historical average of 5.0% of its sales. On its 4Q16 conference call, Nordstrom’s chief financial officer, Mike Koppel, indicated that the lower percentage was due to moderation in store investments.
Investment in technology
Nordstrom wants to direct 40% of its planned capex toward technology and the expansion of its fulfillment network. These investments include modernizing the company’s technology platform and making digital and mobile enhancements. Such investments become crucial for Nordstrom and its department store peers as more and more consumers shop online.
In fiscal 2016, Nordstrom generated over $3 billion in online sales. According to the company’s Koppel, online sales now account for ~25% of Nordstrom’s business, compared to 8.0% in 2010.
Department store peer Kohl’s (KSS) expects capex of ~$700 million in fiscal 2017. The company intends to direct ~$350 million of its planned capex toward IT (information technology) spending.
Nordstrom and Kohl’s together account for 0.5% of the Consumer Discretionary Select Sector SPDR ETF (XLY).
About 20% of Nordstrom’s planned capex will be invested in its Canadian and Manhattan stores. Nordstrom was operating five full-line stores in Canada as of the end of fiscal 2016. The company plans to open one more full-line store in Canada in fiscal 2017.
The company’s five full-line stores in Canada contributed $300 million in sales in fiscal 2016. Nordstrom sees its Canadian expansion as a $1 billion sales opportunity over the long term.
Nordstrom has allocated 15% of its planned capex to new stores and store relocations. About 25% of Nordstrom’s capital budget is expected to be spent on store remodeling and maintenance.
We’ll discuss the company’s valuation in the next part of this series.