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Why Nordstrom's Big Buy Might Be a Bad Move

Retailers developing an e-commerce presence and online shops establishing a physical footprint are nothing new. The omnichannel strategy allows customers to choose how, where, and when they want to shop.

Yet Nordstrom (NYSE: JWN) acquiring an ownership stake in British online fashion retailer Asos as a way of attracting younger, trendier customers to its stores is a risky move, one investors should approach with caution.

Group of five friends.

Image source: Asos.

Buying access to a younger customer

Through this joint venture with Asos, Nordstrom is taking a minority interest in several brands, including Topshop, Topman, Miss Selfridge, and HIIT. The company noted in the announcement press release, "Whilst Asos will retain operational and creative control of the Topshop brands, a shared ownership model will ensure close collaboration between the U.S. retailer and ASOS, driving a stronger future for the iconic Topshop brands worldwide."

They contend the investment will help drive global growth for the brands that creates "unprecedented collaboration and alignment, redefining the traditional retail/wholesale model."

Topshop and Topman will be available exclusively through Nordstrom in North America, and Asos customers will be able to pick up their online orders at Nordstrom and Nordstrom Rack locations.

Malls are still ghost towns

The way consumers shop continues to evolve, and the apparel industry is adjusting to this new reality. With shopping mall traffic declining, department stores in particular are suffering from this dramatic shift -- even their anchor store status is no longer enough to draw in customers.

Data from mobile-device location data analytics firm Placer.ai shows indoor shopping mall traffic was down 8.1% last month compared to the same period in 2019. That's a big leap forward from February when traffic was down nearly 29%, but it's only a slight improvement from May's 8.3% decline, indicating there remains a reticence among consumers to go back to the mall.

Even outdoor shopping malls are struggling. Although nearly half the U.S. populace is fully vaccinated, and outdoor settings have a sharply diminished capacity for transmitting the coronavirus, traffic at these venues is still off 5.6% from two years ago.

As Placer.ai notes, it puts the malls within striking distance of achieving parity with pre-pandemic traffic levels, but it could also mean this is as good as it gets. Malls just don't have quite the same draw as they used to, and Nordstrom recognizes that.

Battling back

While the retailer's namesake stores have long been synonymous with shopping malls, particularly top-tier Class A locations, Nordstrom has increasingly relied upon its discount brand Nordstrom Rack for sales, in addition to a robust e-commerce platform.

In the fiscal first quarter (ended May 1), Nordstrom Rack sales accounted for 37% of total revenue, up from 33% in the prior-year period. Digital made up 46% of the total. Because stores were closed for part of the quarter last year due to the pandemic, digital made up a bigger share of the top line at 54%, but keep in mind this category totaled just 31% in the first quarter of fiscal 2019.

Buying a minority stake in Asos gives the company a greater online presence while also making its stores an exclusive destination for some of the British retailer's brands.

Concentrating risk

The problem comes from a retailer buying into a retailer as it concentrates the risk if business declines. It's the same sort of issue facing shopping mall operators Simon Property Group and Brookfield Asset Management, which are buying bankrupt retailers to keep their stores open.

While vacant stores might beget more vacancies, leading to a domino effect, the malls are doubling down on struggling businesses when the long-term trends seem to be working against them. As the data indicates, customers are still not enthralled with going back to stores in person.

Similarly, Nordstrom's sales are still below 2019 levels. Two years ago, first-quarter net sales totaled $3.35 billion; in the current fiscal year, they hit $2.92 billion, down 13%.

Store visits are still below pre-pandemic levels too. Placer.ai says the retailer's visits bounced back sharply in June -- and Nordstrom did better than Nordstrom Rack -- but as the month wore on, the patterns worsened.

Weekly store visits at Nordstrom and Rack stores

Data source: Placer.ai. Chart by author.

Although the Asos brands are an attempt to help boost those figures, and if successful could introduce it to new customers while furthering its push into e-commerce, it could also exacerbate the problem in a downturn.

Not only would Nordstrom feel the effects of weaker demand at its own stores, but it will now feel any decline in the Asos business as well, deepening the impact of the falling sales.

Shopping where your mom shops

Nordstrom, a store associated with older, more well-off customers, is trying to appeal to a younger demographic to revive its fortunes. "We could not have found a better partner in Asos, the world leader in fashion for the 20-something customer, and are thrilled to have the opportunity to work with them to reimagine the wholesale/retail partnership," said president and chief brand officer Pete Nordstrom.

Yet the investment could also give off a "how do you do, fellow kids" vibe as this established high-end department store tries to appeal to a new customer. By hitching its wagon to another retailer, Nordstrom also risks accelerating any downturn if consumer fashion trends prove as fickle as they've always been.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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