Nordstrom: Moat Rating Downgraded to None as Retail Competition Intensifies; Shares Attractive

We are adjusting our moat rating on Nordstrom to none from narrow as we no longer believe it has a competitive advantage based on a brand intangible asset. The company operates the largest US luxury department store company by sales, and Rack is one of the larger off-price concepts in the market. As such, we have historically believed it had an advantage over other traditional department stores like Macy’s and Kohl’s, both rated as no-moat. However, recent financial results suggest that the market forces, such wide-moat Amazon’s apparel offerings, that have drawn sales from traditional department stores are negatively impacting Nordstrom, as well. Over the past decade or so, its operating margins have declined to the midsingle digits from the low double digits as its sales growth has been inconsistent and its selling, general, and administrative costs have risen to about 34% of net sales from less than 28% prior to 2015. While its management often discusses various solutions to its problems, we anticipate significant spending will be needed to contend with the competitive threats to both of its nameplates.