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2 Reasons Nordstrom Could Be Poised for Better Performance

While Nordstrom (NYSE: JWN) has fared better than most of its retail peers in the past few years, it hasn't been immune to the ongoing declines in mall traffic. Last year, its comparable-store sales fell 0.4% despite a double-digit increase in online sales.

This weakness in brick-and-mortar sales has put pressure on Nordstrom's profitability. The stock price has plunged, such that the Nordstrom family now wants to take the company private to stay out of the public eye while working on a turnaround.

Nordstrom has been hurt by weak retail traffic trends. Image source: Nordstrom.

However, two recent developments could boost Nordstrom's results sooner than expected. First, the economy is red hot in Canada, which should drive sales growth at Nordstrom's new stores there. Second, other upscale U.S. retailers with weaker finances may finally be ready to shrink.

Canada's economy is gaining steam

Nordstrom entered the Canadian market in late 2014, with a full-line store in Calgary. It added stores in Ottawa and Vancouver in 2015, followed by two stores in Toronto last year. A third Toronto-area location is set to open next month, before Nordstrom shifts gears to start opening its off-price Nordstrom Rack stores in Canada.

However, the Canadian dollar began to plunge in value relative to the U.S. dollar just as Nordstrom started to open its stores in Canada. This depreciation of the Canadian dollar hurt Nordstrom's profitability in Canada. To make matters worse, Canada's GDP growth slowed to a crawl around the same time, weighed down by weakness in commodity prices.

Canada GDP Growth, data by YCharts.

However, the Canadian economy has bounced back in 2017. GDP surged 3.7% in Q1. Growth has remained strong since then, as resource sectors such as oil and gas start to recover, putting Canada on pace to post real GDP growth of about 3% this year.

The Canadian dollar has been gaining ground, too. It recently reached its strongest level against the U.S. dollar in more than two years. This rise should give Nordstrom a boost as it tries to make its Canadian operations sustainably profitable.

US Dollar to Canadian Dollar Exchange Rate, data by YCharts.

Will competition start to moderate?

Back in its core U.S. market, Nordstrom is still suffering from the oversupply of retail space that is plaguing the whole industry. Nordstrom has been closing stores here and there, but it should really fall to less profitable retailers to close their underperforming stores.

There are now signs that Nordstrom's weaker competitors could start downsizing in a meaningful way. For example, Neiman Marcus has closed three of its off-price Last Call stores in 2017, and the company recently announced that it is taking a closer look at the Last Call chain as a whole. This suggests that more store closures could be on the way.

Downsizing by Hudson's Bay (TSX: HBC) could have an even bigger impact on Nordstrom. Today, Hudson's Bay is arguably Nordstrom's No. 1 competitor, through its ownership of luxury chains Lord & Taylor and Saks Fifth Avenue. However, sales and earnings have been declining sharply at Hudson's Bay recently, primarily because of the company's U.S. operations.

Since June, real estate-focused investment firm Land and Buildings Investment Management has been hounding Hudson's Bay to downsize its U.S. retail footprint while selling off the valuable underlying real estate. Land and Buildings upped the ante this week, threatening to call a special meeting with the goal of replacing the board of directors if Hudson's Bay doesn't take quick action to realize the underlying value of its real estate.

It's certainly possible that management will continue to drag its feet -- and Land and Buildings will fail to gain control of the board -- leaving Hudson's Bay at its present size in the United States. But the probability of a meaningful downsizing initiative is greater than it ever has been. As the biggest upscale retail chain in the country, Nordstrom would be a key beneficiary.

Nordstrom has what it takes to be a long-term winner

Notwithstanding a 19% year-over-year EPS jump in the first quarter of 2017, Nordstrom doesn't expect to grow its earnings on a full-year basis. Weak traffic in its full-line stores and the cost of various growth initiatives remain major impediments to short-term earnings growth.

That said, if Nordstrom is hurting, its less-profitable rivals are facing even more pain. This situation could soon lead to a much-needed shakeout in the luxury department store space. Meanwhile, Nordstrom's Canadian operations are on track to be a steady source of earnings growth for the next several years.

There's a reason the Nordstrom family wants to buy the rest of the company. Despite its recent challenges, Nordstrom isn't likely to stay down for long.

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Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.