Signage outside a Nordstrom Rack retail store in Latest York, Aug. 25, 2022.
Gabby Jones | Bloomberg | Getty Images
Shoppers are hungry for deals as they pay more for food and necessities. Persons are in search of clothes and accessories as they juggle parties, vacations and days on the office again.
But that has not helped Nordstrom’s off-price chain, Nordstrom Rack. The brand stays a weak spot in the general Nordstrom portfolio, with sales totaling $4.81 billion in essentially the most recent fiscal 12 months, below pre-pandemic levels. In the vacation quarter, Nordstrom Rack’s net sales dropped about 8%, underperforming the roughly 2% decline of the corporate’s namesake banner.
Despite Rack’s struggles, the Seattle-based department store operator is betting it will possibly turn the lagging chain right into a growth driver. It plans to open 20 stores this 12 months with more coming after that.
Nordstrom Rack has formed a dedicated leadership team, which incorporates some off-price veterans. It sharpened its concentrate on the favored brands that sell well.
The success or failure of the Nordstrom Rack turnaround effort could shape the corporate’s future. Nordstrom’s overall sales were stagnant even before the Covid-19 pandemic. Now, discretionary merchandise is under pressure due to inflation and better costs for essentials have nudged consumers toward off-price names. Those chains equivalent to T.J.Maxx, Ross Stores and Burlington Stores, have opened more stores and wooed latest customers, driving higher foot traffic than Nordstrom Rack has seen.
Nordstrom, meanwhile, is bracing for a sales decline. It said in March it expects revenue to fall between 4% and 6% this fiscal 12 months compared with the prior one. That features the effect of its recent decision to shutter its stores and online business in Canada.
Company leaders pinned slowing sales on Nordstrom-specific issues, in addition to a tougher economy.
In an interview with CNBC, Chief Stores Officer Jamie Nordstrom said Rack locations got hit by inventory troubles throughout the Covid pandemic. Shelves swung between having too many items and too few. Too many items got here from brands fashion-forward customers didn’t recognize, he added.
“For those who went right into a Nordstrom Rack, you saw a brand you’ve got never heard of. That is probably not something our customers are in search of,” he said. “If I went right into a Rack store — and I have been working on this industry my entire life — if there is a brand that I’ve never heard of, [it’s] probably not an excellent brand. That is what we fixed.”
CEO Erik Nordstrom said shoppers have grow to be more hesitant to spend. On a call with investors in March, he said the retailer saw shoppers pull back on spending in late June and thru the vacation season. The trend was more pronounced at Rack and amongst lower-income customers than on the chain’s flagship stores.
He said just a little over half of Rack’s sales decrease within the fiscal fourth quarter was driven by company actions to spice up profits. Those include moves to eliminate store-based success of online orders and increase the minimum amount people must spend online to get free shipping.
In the corporate’s recent letter to shareholders, Erik Nordstrom acknowledged the corporate fell short prior to now 12 months. He said improving Nordstrom Rack’s sales is one among its top priorities.
Digital sales could give Rack an edge. Off-price players have been slower to maneuver online as they concentrate on the in-person treasure hunt.
But store traffic at Nordstrom Rack has lagged behind traditional off-price banners equivalent to Ross Dress for Less, Burlington, Marshalls and T.J. Maxx in comparison with the year-ago period, based on monthly data from Placer.ai, which tracks retail foot traffic. In April, for instance, store traffic was down nearly 16% year-over-year at Nordstrom Rack compared with about 3% growth at each T.J.Maxx and Marshalls. 12 months-over-year store traffic in April declined about 7% at Ross and about 3% at Burlington.
Store traffic doesn’t, nonetheless, capture what number of items shoppers leave with or how much they’re buying online at home.
Nordstrom’s struggles have attracted outside scrutiny. Activist investor Ryan Cohen, chairperson of GameStop and founding father of Chewy, bought a stake in the corporate earlier this 12 months through his investment firm, RC Ventures. He has pushed for changes at the corporate as sales stagnate.
Cohen withdrew a proposal to nominate two candidates for Nordstrom’s board, but is keeping options open, including proposing board member changes again, based on a source conversant in the matter.
Cohen declined to a request for comment. Nordstrom also declined to a request for comment on the activist dispute, but said in an announcement the corporate “stays focused on executing its strategy and driving long-term profitable growth and value creation.”
In a tweet Friday, Cohen referred to this text about Nordstrom Rack with a one-sentence reply: “Shareholders want cost cuts and no cronyism.”
Individually, the corporate recently added Eric Sprunk, former Nike chief operating officer, to its board. This week, it also named former Goal executive Cathy Smith as its latest chief financial officer.
Shares of Nordstrom reflect its lackluster performance. The stock has fallen about 6% to this point this 12 months, underperforming the 7% growth of the S&P 500 and 1% gain of the retail-focused XRT. Its stock closed at $15.13 Thursday, roughly half its 52-week high.
Nordstrom will offer updates about its turnaround strategy when it reports earnings May 31.
‘Golden moment’ for off-price
Nordstrom Rack, a brand that caters to bargain-hunting fashionistas, was founded in 1973. Because the department store retailer has closed some full-line stores, it has opened more of the off-price locations.
Nordstrom Rack stores outnumber the corporate’s namesake stores, with 241 locations across the country, based on company filings. But other off-price names have higher sales and a bigger footprint.
Jamie Nordstrom said the Rack stores are the retailer’s “single-largest vehicle for brand spanking new customer acquisition.” Customers who’re younger and with less disposable income often get introduced to Nordstrom through the lower-priced chain, then move to the pricier namesake store, Jamie Nordstrom said. He added Nordstrom customers are likely to shop each brands.
Nordstrom Rack stores accounted for greater than 40% of latest customers in 2022, CEO Erik Nordstrom said on the March earnings call.
The stores are also a technique to move merchandise out of its full-line business, but still sell it in a profitable way, Jamie Nordstrom said. Rack also buys from brands’ closeout sales.
Because it pins its growth hopes on the off-price locations, Nordstrom has turned Rack stores into e-commerce hubs, too. Customers can pick up and return online purchases at Rack locations, which are likely to be closer and more convenient than mall stores.
Other department shops have also expanded into off-price. Names equivalent to Saks Off Fifth and Macy’s Backstage stores fit into the increased emphasis on lower-priced items.
Yet retailers face an inherent tension if they struggle to juggle each sorts of stores, said Simeon Siegel, a retail analyst from BMO Capital Markets. Off-price retailers generate income by being opportunistic. They snap up eye-catching items from reputable brands wanting to offload out-of-season or excess merchandise.
Retailers with full-priced businesses can fall right into a trap of using the stores to park their very own merchandise that hasn’t sold and few people want, he said. That may hurt shoppers’ experience and merchants’ discipline.
“Off-price must have a maniacal concentrate on buying other people’s mistakes,” he said. “Not yours.”
Adrienne Yih, a retail analyst for Barclays, said Nordstrom Rack within the early years relied heavily on its department store merchandise. It doesn’t have the identical muscle of longtime off-price players, which have teams that quickly snap up hot-ticket items.
She dubbed 2023 as off-price’s “golden moment” because many retailers and types got stuck with a variety of extra inventory. Sophisticated buyers can get good merchandise for less.
“Knowing what to purchase at what price could be more necessary on this environment,” Yih said.
Yih added Rack doesn’t have the identical breadth as off-price competitors, which have large categories equivalent to home goods and food. Plus, Nordstrom risks stealing sales away from its namesake business, she said.
Rack has a ‘long runway’
Jamie Nordstrom said a small percentage of Nordstrom Rack’s merchandise comes from its full-size stores. He declined to specify further. Together with transferring from stores, it buys direct and closeout purchases from brands and carries some Nordstrom-made products.
But he and other Nordstrom leaders acknowledged the Rack lost its way.
Jamie Nordstrom said the corporate has already taken steps to show the off-price chain around. It’s zeroed in on merchandise customers want, including higher-end brands that are not typically found at off-price competitors. It’s rolled out a latest logo and refreshed its website.
Nordstrom Rack has also tapped some off-price veterans, including Nancy Mair, senior vp of Rack merchandising, formerly of Burlington, and Kelly Wotton, vp and divisional merchandise manager of Rack, previously of Macy’s Backstage and T.J.Maxx’s parent company TJX.
On the corporate’s website, Rack touts clothing, shoes, handbags and more from brands equivalent to Vince, Kate Spade and Ferragamo. Jamie Nordstrom said it must keep that fashion-forward approach sharp together with emphasizing value.
“Our customers are brand first, price second,” he said. “Where we went, with good intention, we went price first, brand second. And our customers didn’t reply to that.”
Sales performance is stronger at the corporate’s three newest Rack stores, Chief Brand Officer Pete Nordstrom told investors on the March call. He called that a “proof point” when brands are hot and merchandise is fresh, shoppers respond.
As customers watch their budgets, Jamie Nordstrom said Rack is poised to learn. He called the stretch after the Great Recession “the very best run we have had in the trendy history of our company.”
“We expect that chance is correct in front of us today,” he said.
He added Nordstrom Rack’s footprint will grow. It has a tiny fraction of locations in comparison with TJX’s roughly 4,700 stores, Ross’ nearly 1,700 stores and Burlington’s roughly 900 stores.
“As we discover great locations to open a Rack store, we will be very interested,” he said. “We expect there’s an extended runway.”
