Can the Nordstroms Find the Right Style?

They'll need more than great service to get back on top

Once, back in the 1970s, when Bruce A. Nordstrom was standing on the shoe floor of his flagship Seattle store, a shopper congratulated him on his company's great customer service, telling him how nice he must be. He bluntly told her that "nice" had nothing to do with it: "It's because we're competitive and greedy, and we want to win."

Shareholders no doubt wish the venerable company could demonstrate more of that ruthless determination today. Nordstrom Inc.'s (JWN ) dreary financial record hangs over the department-store chain like a dark Seattle rain cloud. First-quarter profits fell 24%, to $24.8 million, on sales of $1.2 billion, after a year that saw earnings plummet nearly 50%, to $102 million, on sales of $5.5 billion. Same-store sales declined 3.7% in the quarter. With the economy in the doldrums, the outlook for the rest of the year doesn't look much brighter. Not surprisingly, shareholders have gotten whacked: From a high of $44.81 in 1999, the stock plunged to $14.19 last year. Recently, it has risen to about $19.

LONG ODDS. Now the Nordstrom family is back in charge of the company founded by John W. Nordstrom in 1901. Blake W. Nordstrom, 40, who ran the company's 46-store discount Rack Div., took over as president last August after the ouster of John Whitacre--the only non-Nordstrom ever to run the company. The family-controlled board also persuaded Bruce Nordstrom, 67, a former president and Blake's father, to return as chairman and adviser to his sons. Peter oversees buying and fashion decisions, while Erik runs the department stores.

But will it matter? The odds seem long that Nordstrom can recapture the edge it enjoyed during the '80s. Today, even many upscale customers prefer discounts to pampering. Wall Street analysts say bigger retailers such as Federated Department Stores, Dillard's, or May Department Stores could gobble up Nordstrom if Blake fails to deliver stronger results within two years. Blake denies the family wants to sell but acknowledges that he may have no choice if he can't pump up earnings. "I can't guarantee we'd never be for sale," Blake says. "If we were to fail, I'm sure the board would have to revisit all options."

That sense of urgency was clear as the new CEO went to work to stanch Nordstrom's hemorrhaging. He rebalanced the women's clothing selection, shifting back to more classic lines. Almost overnight last year, the retailer had estranged many core customers with a fashion face-lift called "Reinvent Yourself." The aborted campaign seemed to cater to twentysomethings at the expense of longtime boomer shoppers. Blake also canceled four of 23 planned store openings and renewed Nordstrom's emphasis on lavish customer service. "We know by giving good service we sell more," Blake says. "It's the heart and soul of our business."

KNOTTY DILEMMA. But the retail world has changed since Nordstrom's heyday. With the rise of such specialty retailers as Talbots, The Limited, and Ann Taylor (ANN ), competition is ferocious. And its old winning formula--great customer service--isn't the easy advantage it once was. Neiman Marcus Group Inc. (NMG ) is now No. 1 in service among department-store chains. It generates annual sales of $490 per square foot, handily eclipsing second-place Nordstrom at $342. And Talbots Inc. (TLB ) also took a page from Nordstrom's playbook. The Hingham (Mass.) chain improved its service and stuck to classic merchandise. The result: It ended last year as one of the best-performing retailers in the nation, with same-store sales jumping 17%.

Nordstrom faces an even knottier dilemma these days: the growing emphasis on value. Consumers are much more willing to shop around. Nordstrom's response has been to try to do it all by offering superior service at middle-income prices. In fact, the chain has always been torn between the art and science of retailing. It mastered the art--beautiful store designs and marketing, for example. But it always stumbled on the science--inventory and expense management, as well as consistency in execution, analysts say. Those unglamorous back-shop details matter in a value-driven market.

For Nordstrom to regain its luster, Blake must continue to take drastic measures. Chief among them is slashing the company's bloated overhead. Annual selling, general, and administrative expenses run about $100 a square foot, vs. $60 industrywide. Next, he needs to accelerate the installation of the company's first computerized inventory system, which is still almost a year away from reaching all 123 stores. Nordstrom still partly depends on handwritten notes compiled in loose-leaf binders by sales clerks to manage inventory. "They are doing a lot of guessing and hand counting," says A.G. Edwards & Sons Inc. (AGE ) retail analyst Bob Buchanan.

Is Blake up to the challenge? The family business is certainly in his blood. He has worked at Nordstrom since age 14, starting in the stock room of the shoe department in Bellevue, Wash. Betsy Sanders, a former Nordstrom vice-president and a director at Wal-Mart Stores Inc. (WMT ), at one time had 11 Nordstrom kids working under her, including Blake and Peter. "They paid their dues," she recalls. "They worked really hard." Blake handled stints as a buyer, store manager, regional vice-president, and division president before accepting the top spot. While running the Rack clothing chain for a year, he added 10 stores and saw sales rise 18.3%. "In every assignment, I had gains, beat the company average, and saw improvement," he says. "I'm confident of my ability."

OFF-KILTER. But many analysts and investors say Blake will have to step up the pace--and wonder whether he has a deep enough background to make the tough decisions. "I would've preferred to see a manager come from the outside who had experience with inventory management," says J.P. Morgan Chase & Co. (JPM ) analyst Shari Eberts. Indeed, a huge inventory overhang from last year still plagues the chain. And while Nordstrom is working to improve its store layouts, an off-kilter mix of merchandise still turns off some customers. Recently, Gloria Hatch couldn't find any outfits for larger women at Nordstrom's Northgate store near Seattle or a clerk to help her look, so she took her $600 worth of business to a rival Bon Marche department store. Her take: "I find shopping at Nordstrom too frustrating."

There are, however, hints that the chain has touched bottom. In June, the retailer turned in a 1.4% year-on-year gain in same-store sales, its first for the year. And the crucial women's apparel category, 36% of total sales, showed its sixth straight month of year-on-year gains in June, thanks in part to Nordstrom's higher-margin private labels. At least one investor is encouraged. Says Jeff Huffman, a pension-fund manager for Crabbe Huson Group Inc., which recently bought 600,000 shares: "I think they have a pretty good handle on where they made their mistakes and what they need to do to get customers back."

Can Blake and his brothers get it right? The future of their great-grandfather's company may depend on it.

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