The retail apocalypse is torpedoing Nordstrom's attempt to go private -- and the whole industry is paying for it

Nordstrom’s stock surged last month on reports it was in talks to go private. Now the department store chain is getting the opposite treatment from the market amid speculation that the deal is falling apart — and it’s dragging the rest of the industry with it.

The Nordstrom family has struggled to raise enough debt to finance the go-private deal, according to a report from the New York Post. While the company had been in discussions to get roughly $US1 billion from private equity firm Leonard Green & Partners, the total transaction could end up needing closer to $US10 billion, the Post said.

The reaction in the stock market to the development has been swift and punishing. Nordstrom’s stock dropped 7.4% as of 12:58 pm EST, while fellow department stores JCPenney (-8.3%), Dillard’s (-7.1%) Macy’s (-5.6%) and Kohl’s (-4.1%) were collateral damage.

Nordstrom’s contagious woes are just the latest entry in the ongoing retail apocalypse, which has seen emerging juggernauts like Amazon threaten the long-term future of traditional brick-and-mortar retailers. Just two weeks ago, Toys R Us filed for bankruptcy amid industry headwinds, while traders also placed large bets against the store’s suppliers.

In fact, the Toys R Us bankruptcy has played a direct role in Nordstrom’s failure to raise debt, with potential investors feeling anxiety around sinking money into an unstable area, according to the Post.

And while news of the financing struggles is hitting Nordstrom shares, William Blair analyst Dylan Carden isn’t particularly surprised, describing the debt-raising process as a “major sticking point” for the success of the deal in a research note published on Monday.

To make matters even worse, Nordstrom investors weren’t exactly braced for a negative development in the go-private process. Prior to Monday’s sell off, short interest on the company’s stock was at its lowest level since 2015, relative to outstanding shares available to loan, according to IHS Markit data.

Nordstrom short interestBusiness Insider / Andy Kiersz, data from IHS MarkitShort interest in Nordstrom was low before Monday’s sell off, despite the pressures facing brick-and-mortar retailers.

The lack of bearish positioning may be explained by the fact that even following the initial news about Nordstrom’s go-private plans, the company’s stock was down 1.6% year-to-date.

Regardless of the reason, there’s still enough trepidation around retailers for investors to be positioned defensively against further losses in the broader industry. Short interest on the SPDR S&P Retail ETF, a $US358 million fund that tracks 88 companies, has spiked in recent weeks. It now sits at more than double its three-year average, IHS Markit data show.

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