Nordstrom’s Canadian Retreat Spurs Unusual Options Activity But No Definitive Direction for Stock

As a Canadian, I wasn’t too surprised about Nordstrom’s (JWN) announcement Thursday that it would shutter its Canadian operations by June, putting more than 2,500 people out of work.
Nordstrom’s foray into Canada began with great fanfare in September 2014 with a store in Calgary, followed by five more full-line stores, seven Nordstrom Rack locations, and an e-commerce operation.  

“We entered Canada in 2014 with a plan to build and sustain a long-term business there. Despite our best efforts, we do not see a realistic path to profitability for the Canadian business,” said chief executive officer Erik Nordstrom in a press release.

In an eerily similar fashion to Target’s (TGT) exit in 2015, Nordstrom is another American firm that failed to understand the Canadian marketplace. While similar in population to California, there aren’t as many big spenders north of the border. 

“I’ve always felt that the Canadian market was oversaturated with department stores because the depth isn’t there and the economy isn’t there, and on the high end there’s just not enough deep pockets,” The Globe and Mail reported retail consultant George Minakakis’s comments about Nordstrom’s exit. 

When Target exited, it took a $5.4 billion charge. Nordstrom’s charge will be between $300 million and $350 million. 

The news yesterday was at the same time it reported Q4 2022 earnings. As a result, it led to unusually active options and share volume. 

JWN volume was 8.64 million on Thursday, about one million higher than its 30-day average, while its options volume was 106.094, more than 3x its 30-day average of 31,966. 

JWN is up a little more than 1% as I write this on Friday late morning. While this would indicate investors view both pieces of yesterday’s news (exit and earnings) as positive, the put/call ratio on Thursday was 1.45, suggesting investors weren't optimistic about Nordstrom stock’s future direction. 

Here are my two cents about the pros and cons of yesterday’s news and what unusually active options might be worth a look at.

Nordstrom Was Fighting a War on Two Fronts

In my Thursday article for Barchart.com, I discussed the relatively good news Macy’s (M) delivered in its Q4 2022 results. While the department store chain’s fourth-quarter results were better than analyst expectations on both the top and bottom lines, CEO Jeff Gennette was very conservative in his views for 2023. 

Macy’s believes the next 10 months could be a volatile time for the American economy, which would reduce the consumer’s desire to spend on anything other than necessities. Or, we could get lucky, and the “R” word doesn’t rear its ugly head. No one knows what will ultimately happen. 

There’s no question Nordstrom shares a similar opinion.  

“We expect that elevated inflation and rising interest rates will continue to weigh on consumer spending, especially in the first half of the year,” stated interim CFO Micheal Maher in its Q4 2022 conference call. 

“We also anticipate continuing inflationary pressure on our expenses, especially labor and transportation costs.”

Nordstrom beat analyst estimates for profits in the quarter but missed the consensus revenue estimate. Macy’s beat on both. 

On the top line, it had revenue of $4.32 billion, $20 million less than the analyst estimate and 3.7% less than Q4 2021. On the bottom line, it earned 74 cents, eight cents higher than the consensus, but 39.8% less than a year ago. 

Interestingly, by shutting its Canadian operations, its overall revenues will fall by $400 million in 2023, but its EBITDA profit will increase by $35 million. It’s the ultimate case of addition by subtraction. 

The reality is that the U.S. department store business is a competitive one. By fighting a war with Macy’s, Saks, and the like in the U.S. and Hudson’s Bay Company in Canada, it was fighting a war on two fronts. A war that wasn’t profitable. 

Retreating was a wise move. 

The Fight in Canada Should Have Been Easier

Canada has never been a mecca for home-bred retail superstars. Sure, there have been some successes outside the country, such as Lululemon (LULU) and Aritzia (ATZAF), but for the most part, our biggest chains are American or European offshoots. 

In the department store space, its only real competition was the Hudson’s Bay Company and, to a lesser extent, Simons, a Quebec-based chain expanding its reach outside the province in recent years. But that’s it. 

Hudson’s Bay has had problems growing its sales in recent years because Canadians have been quick to buy products online or directly through brands like Nike (NKE) and Apple (AAPL). They’ve also supported discount stores such as Costco (COST) and Dollarama (DLMAF). 

Those last two relate to the comments by retail consultant George Minakakis in the intro. There’s only so much money to go around. Once Canadian consumers have spent their discretionary income on Apple and Nike products, they’re in the mood to save money at Costco and Dollarama. 

You’ll find that Costco is probably the American retailer most successful in Canada. They have no problems making money here. It’s often more profitable per capita than its U.S. business. It took them 37 years to go from one store in Burnaby, B.C., to 136 today. Their patience has been rewarded.

I don’t know if the Nordstrom family, located so close to Vancouver, thought it could do a better job of department store retail than Hudson’s Bay. However, they clearly didn’t anticipate that its business would still be unprofitable north of the border eight years later.

In the case of Target, it bit off more than it could chew, taking on approximately 220 Zellers store leases in one transaction, a monumental task for any sized business. Nevertheless, it learned from its mistakes.   

However, it really shouldn’t have been this difficult for Nordstrom to capture a slice of the Canadian consumer’s discretionary spending. This reflects poorly on Nordstrom management’s decision-making. 

The Options Worth Considering

Nordstrom had 23 options exhibiting unusual activity on Thursday. That's a volume of at least 1.25x open interest. Nine were put options with 14 calls. 

The top option by volume was the March 3 $19 put with 11,620 and a Vol/OI ratio of 2.21. The top Vol/OI ratio was the March 17 $22 call with volume of 5,705, 22.20x open interest. The ask price on this was $0.50 yesterday. Today, it’s $0.18, a sign investors don’t think it will get to $22 in 14 days.   

I’d be more inclined to sell the March 17 $22 put with $2.31 in premium income. That lowers your purchase price to $19.69, about where it’s currently trading, compared to $22.18 for the call.

Ultimately, I believe Macy’s is the better bet if you buy a department-store stock.

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