In recent years, with in-store sales sagging, downsizing has become the norm in the department store industry. As a result, many department store chains have looked to sell off excess real estate in order to cash in on high property values.
Nordstrom (NYSE: JWN) never expanded as much as its lower-price competitors, and since all of its stores are profitable, it hasn’t felt the need to shrink dramatically. Nevertheless, it is closing stores here and there. Given that the Nordstrom store base is heavily skewed toward the best malls in North America, even a relatively small number of store closures and asset sales could provide a meaningful windfall for the company and its investors.
Closing stores slowly
At the beginning of fiscal 2018, Nordstrom had a little more than 120 full-line stores. It owned 33 of those stores outright and ground-leased another 63. (A ground lease is an arrangement where Nordstrom owns the store building but has a long-term lease for the underlying land.)
In recent years, Nordstrom has closed about two stores per year, as some locations aren’t living up to the brand’s lofty standards and don’t make enough money to justify major investments. Nordstrom’s management has indicated that this pace of store closures is likely to continue, at least in the near future.
In the past 12 months, Nordstrom has closed two stores: one in Dulles, Virginia, and one in Salem, Oregon. The Dulles store was just 15 miles from Nordstrom’s store at Tysons Corner Center, a much busier and more vibrant mall. Meanwhile, the Salem Center store was dated and undersized. In today’s era of e-commerce, the Salem market is just too small to support a full-line Nordstrom. (Additionally, three Portland-area stores are only 40 to 50 miles away.)
Local property records indicate that Nordstrom still owns both stores. However, there is no reason to keep them in the long run. The Salem store has an assessed value of about $9 million, while the Dulles store’s assessed value is approximately $14 million. Thus, Nordstrom could bring in $20 million or more from selling two of its least valuable properties.
Cashing in on buoyant San Francisco property values
At the other end of the spectrum, Nordstrom owns some extremely valuable properties in San Francisco, one of the hottest real estate markets in the country. Its flagship store in downtown San Francisco isn’t going anywhere, but Nordstrom plans to close its other full-line store in the city — which is in the Stonestown Galleria mall — according to the San Francisco Business Times (subscription required).
Nordstrom’s Stonestown store is ground leased, but the company doesn’t pay any base rent. Instead, it just covers a portion of the common area costs and pays percentage rent for sales above $35 million a year. (Nordstrom has reportedly seen a steep drop-off in sales at this location, so in reality it probably pays little or no rent now.)
Macy’s sold its Stonestown store to the mall owner last year for nearly $41 million. Nordstrom’s store is smaller and the fact that it is ground leased reduces its value somewhat, although Nordstrom has renewal rights running all the way to 2096. Still, this property could bring in $20 million to $30 million in a sale.
Nordstrom also owns a service parking lot near its downtown San Francisco store that it plans to sell. A developer wants to build a 31-story apartment tower there and has an option to purchase the land. Neither party has revealed the potential sale price, but given the extreme shortage of buildable land in San Francisco (particularly downtown), it could be substantial.
The cash windfalls can be returned to shareholders
While Nordstrom is never going to generate as much cash from real estate sales as a larger rival like Macy’s, it also has less debt to manage. Furthermore, its internally generated free cash flow could surge over the next few years, as capex spending moderates and some of Nordstrom’s recent growth investments start to pay off.
Nordstrom also has excess cash on its balance sheet, as it had halted its share buybacks while the board was negotiating with the founding family about potentially taking the company private. As of early May, Nordstrom had $966 million of cash and equivalents: up more than $300 million year over year.
Nordstrom may unload that excess cash before its current share repurchase authorization expires at the end of August. The board will likely approve another buyback program soon thereafter. The combination of rising free cash flow and asset sale proceeds could give the company quite a bit of firepower for stock buybacks in the years ahead. This sets Nordstrom up nicely for long-term share price appreciation.
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