Signage outside a Nordstrom Rack retail store in New York, August 25, 2022.
Gabby Jones | Bloomberg | Getty Images
Shoppers are hungry for deals as they pay more for groceries and essentials. People are looking for clothes and accessories while juggling parties, vacations and days at the office.
But that hasn’t helped Nordstrom’s off-price chain, Nordstrom Rack. The brand remains a weak point across the entire Nordstrom portfolio. Revenue totaled $4.81 billion last fiscal year, down from pre-pandemic levels. During the holiday quarter, Nordstrom Rack’s net sales declined about 8%, lagging the roughly 2% decline for the eponymous company.
Despite Rack’s struggles, the Seattle-based department store operator is optimistic it can turn the ailing chain into a growth driver. The plan is to open 20 stores this year, with more to come.
Nordstrom Rack has formed a dedicated leadership team that includes some off-price veterans. The focus has been increased on the popular brands that are selling well.
The success or failure of Nordstrom Rack’s recovery efforts could affect the company’s future. Nordstrom’s overall sales were already stagnant before the Covid-19 pandemic. Currently, consumer staples are under pressure due to inflation and the increased cost of basic necessities prompted consumers to turn to low-cost brands. These chains like TJMaxx, Ross stores And Burlington shopshave opened more stores and acquired new customers, resulting in higher foot traffic than Nordstrom Rack.
Nordstrom, meanwhile, expects sales to decline. In March it was said that sales for this fiscal year were expected to fall by between 4% and 6% compared to the previous year. This includes the impact of the recent decision to close its stores and online business in Canada.
Company leaders attributed the decline in sales to Nordstrom-specific issues and a tougher economy.
In an interview with CNBC, Jamie Nordstrom, Chief Stores Officer, said shelf locations have been impacted by stocking issues during the Covid pandemic. The shelves fluctuated between too many and too few items. Too many items were from brands unfamiliar to fashion-conscious shoppers, he added.
“If you’ve walked into a Nordstrom rack, you’ve seen a brand you’ve never heard of. That’s probably not what our customers are looking for,” he said. “If I walked into a rack store – and I’ve worked in this industry my whole life – if there was a brand I’d never heard of, [it’s] probably not a great brand. We fixed that.
said CEO Erik Nordstrom Buyers have become more reluctant to buy. Speaking to investors in March, he said The retailer saw shoppers pull back spending in late June and during the holiday season. The trend was more pronounced among Rack and lower-income customers than in the chain’s flagship stores.
He said just over half of Rack’s revenue decline in the fiscal fourth quarter was due to actions by the company to boost profits. These include moves to get rid of in-store processing for online orders and increasing the minimum amount people have to spend online to get free shipping.
In the company’s most recent letter to shareholders, Erik Nordstrom acknowledged that the company had underperformed over the past year. He said improving Nordstrom Rack’s sales is one of his top priorities.
Digital distribution could give Rack an edge. Off-Price players move slower online as they focus on personal treasure hunting.
However, store traffic at Nordstrom Rack has lagged behind traditional off-price banners like Ross Dress for Less, Burlington, Marshalls and TJ Maxx compared to the same period last year, according to monthly data from Placer.ai, which tracks retail foot traffic. In April, for example, store traffic at Nordstrom Rack fell nearly 16% year over year, compared to about 3% growth at TJMaxx and Marshalls. Store traffic in April was down about 7% year over year at Ross and about 3% at Burlington.
However, in-store traffic doesn’t capture how many items shoppers take away or how much they buy online at home.
Nordstrom’s struggles have drawn outside attention. Activist investor Ryan Cohen, Chairman of GameStop and founder of Tough, bought a stake in the company through his investment firm RC Ventures earlier this year. He has been pushing for change at the company while sales have stagnated.
According to a source familiar with the matter, Cohen withdrew a proposal to nominate two nominees for Nordstrom’s board of directors but is keeping options open, including proposing again board membership changes.
Cohen declined a request for comment. Nordstrom also declined a request for comment on the activist dispute, but said in a statement the company “remains focused on executing its strategy and driving long-term profitable growth and value creation.”
In a tweet on Friday, Cohen referenced this article about Nordstrom Rack with a one-sentence reply: “Shareholders want cost-cutting, not nepotism.”
Additionally, the company recently added Eric Sprunk, Nike’s former chief operating officer, to its board of directors. Also this week, former Target executive Cathy Smith was named the new chief financial officer.
Nordstrom’s stock reflects the company’s poor performance. The stock is down about 6% so far this year, lagging the 7% growth of the company S&P 500 and 1% profit of retail-focused companies XRT. The stock closed Thursday at $15.13, about halfway from its 52-week high.
Nordstrom will provide updates on its turnaround strategy at the May 31 earnings announcement.
“Golden Moment” at a special price
Founded in 1973, Nordstrom Rack is a brand that caters to bargain-hunting fashionistas. After closing some full-line stores, the department store retailer opened more off-price locations.
According to company records, Nordstrom Rack stores outnumber the company’s namesake stores, with 241 locations across the country. But other off-price names are getting higher sales and exposure.
Jamie Nordstrom said the Rack stores are the retailer’s “single greatest vehicle for new customer acquisition.” Customers who are younger and have lower disposable incomes are often introduced to Nordstrom through the cheaper chain and then move on to the more expensive namesake store, Jamie Nordstrom said. He added that Nordstrom customers tend to buy both brands.
Nordstrom Rack stores accounted for more than 40% of new customers in 2022, CEO Erik Nordstrom said in March’s earnings announcement.
The stores are also a way to relocate full-line items while still selling them profitably, Jamie Nordstrom said. Rack also buys from remnants of brands.
As it is pinning its growth hopes on the off-price locations, Nordstrom has also turned rack stores into e-commerce hubs. Customers can pick up and return online purchases at Rack locations, which are typically closer and more convenient than shopping malls.
Other department stores have also expanded into the off-price space. Names like Saks Off Fifth and Macy’s Backstage Stores fit the increased emphasis on lower-priced items.
Still, retailers face an inherent tension when attempting to juggle both types of deals, said Simeon Siegel, retail analyst at BMO Capital Markets. Off-price retailers make money by being opportunistic. They snag eye-catching items from well-known brands and strive to offload off-season or surplus merchandise.
Retailers with full-price stores can fall into the trap of using the branches to park their own branches Goods that have not been sold and that few people want, he said. This can affect the buyer experience and dealer discipline.
“Off-Price has to have an insane focus on buying other people’s mistakes,” he said. “Not yours.”
Adrienne Yih, a retail analyst at Barclays, said Nordstrom Rack relied heavily on its department store wares in its early years. It doesn’t have the same powers as longtime off-price players whose teams are quick to snag coveted items.
She called 2023 the off-price industry’s “golden moment” as many retailers and brands were stuck with loads of extra inventory. Experienced buyers can get good goods for less money.
“In this environment, knowing what you’re buying at what price can be more important,” Yih said.
Yih added that Rack doesn’t have the same width as low-cost competitors, which have large categories like housewares and groceries. Nordstrom also risks depriving its namesake company of revenue, she said.
Rack has a “long runway”
Jamie Nordstrom said a small percentage of Nordstrom Rack’s merchandise comes from the company’s major stores. He declined to give details. In addition to transferring from stores, the company also purchases direct and close-out brands and carries some Nordstrom-made products.
But he and other Nordstrom executives admitted the rack had lost its way.
Jamie Nordstrom said the company has already taken steps to disrupt the off-price chain. The focus is on what customers want for goods, including higher-end brands not typically found at low-cost competitors. It introduced a new logo and updated its website.
Nordstrom Rack has also won some off-price veterans, including Nancy Mair, senior vice president of Rack Merchandising, formerly of Burlington, and Kelly Wotton, vice president and divisional merchandising manager of Rack, formerly of Macy’s Backstage and TJMaxx’s parent company TJX.
On the company’s website, Rack promotes clothing, shoes, handbags and more from brands like Vince, Kate Spade and Ferragamo. Jamie Nordstrom said it needed to maintain that fashion forward approach while emphasizing value.
“For our customers, brand comes first, then price,” he said. “Wherever we went, with good intentions, we put price first, then brand. And our customers didn’t react to that.”
Sales performance at the company’s three newest Rack stores is stronger, Chief Brand Officer Pete Nordstrom told investors on the March conference call. He called this a “proof point” when brands are hot and goods are fresh, shoppers respond.
As customers watch their budgets, Jamie Nordstrom says Rack is poised to capitalize on this. He called the track after the Great Recession “the best run we’ve had in the modern history of our company.”
“We think we have an opportunity today,” he said.
He added that Nordstrom Rack’s presence will grow. It has a tiny fraction of the locations compared to TJX’s roughly 4,700 stores, Ross’s nearly 1,700 stores, and Burlington’s roughly 900 stores.
“If we find great locations to open a Rack store, we’ll be very interested,” he said. “We believe there is a long runway.”