Signage outside a Nordstrom Rack store in New York, August 25, 2022.
Gabby Jones | Bloomberg | Getty Images
Shoppers are hungry for deals as they pay more for food and supplies. People are looking for clothes and accessories as they juggle parties, vacations and days at the office again.
But that hasn’t helped Nordstrom’s low-cost chain, Nordstrom Rack. The brand remains a weak spot in the overall Nordstrom portfolio, with sales totaling $4.81 billion in its most recent fiscal year, below pre-pandemic levels. In the holiday quarter, Nordstrom Rack’s net sales fell about 8%, less than the company’s namesake’s drop of about 2%.
Despite Rack’s struggles, the Seattle-based department store operator is betting it can turn the lagging chain into a growth engine. It plans to open 20 stores this year with more to follow.
Nordstrom Rack has formed a dedicated leadership team, including some off-price veterans. It sharpened its focus on the popular brands that sell well.
The success or failure of Nordstrom Rack’s turnaround could determine the company’s future. Nordstrom’s overall sales were stagnant even before the Covid-19 pandemic. Now discretionary merchandise is under pressure due to inflation and higher costs for essentials pushed consumers towards off-price names. Those chains like TJMaxx, Ross stores And Burlington Storeshave opened more stores and brought in new customers, driving more foot traffic than Nordstrom Rack has seen.
Nordstrom, meanwhile, is bracing for a drop in revenue. It said in March it expects revenue to fall between 4% and 6% this fiscal year compared to the previous one. That includes the effect of the recent decision to close its retail and online operations in Canada.
Company executives attributed the sales slowdown to Nordstrom-specific issues, as well as a tougher economy.
In an interview with CNBC, Chief Stores Officer Jamie Nordstrom said Rack locations were hit by inventory issues during the Covid pandemic. Shelves fluctuated between too many items and too few. Too many items came from brands that fashion-forward customers didn’t recognize, he added.
“When you stepped into a Nordstrom rack, you saw a brand you’ve never heard of. That’s probably not something our customers are looking for,” he said. “If I walked into a Rack store – and I’ve been in this industry all my life – if there’s a brand I’ve never heard of, [it’s] probably not a great brand. We’ve solved that.”
CEO Erik Nordstrom said shoppers have become more reluctant to spend. Speaking to investors in March, he said the retailer saw shoppers cut back on their spending in late June and during the holiday season. The trend was more pronounced at Rack and lower-income customers than at the chain’s flagship stores.
He said just over half of Rack’s revenue decline in the fiscal fourth quarter was driven by the company’s actions to increase profits. Those include steps to eliminate in-store fulfillment for online orders and increase the minimum amount people must spend online to get free shipping.
In the company’s recent letter to shareholders, Erik Nordstrom acknowledged that the company has fallen short in the past year. He said improving Nordstrom Rack’s sales is one of its top priorities.
Digital sales could give Rack an edge. Off-price players have slowed down online as they focus on the personal treasure hunt.
But store traffic at Nordstrom Rack has lagged traditional off-price banners like Ross Dress for Less, Burlington, Marshalls and TJ Maxx compared to the same period a year ago, according to monthly data from Placer.ai, which tracks retail foot traffic. For example, in April, store traffic was down nearly 16% year-over-year at Nordstrom Rack, compared to about 3% growth at both TJMaxx and Marshalls. Year-over-year, April retail traffic was down about 7% at Ross and about 3% at Burlington.
However, store traffic does not record how many items customers leave with or how many they buy online at home.
Nordstrom’s fight has drawn outside criticism. 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 pushed for changes at the company as sales have stagnated.
Cohen withdrew a proposal to nominate two candidates for Nordstrom’s board, but is keeping options open, including reproposing board member changes, according to a source familiar with the matter.
Cohen declined a request for comment. Nordstrom also declined a request for comment on the activist dispute, but said in a statement that the company remains “focused on executing on its strategy and driving profitable growth and long-term value creation.”
In a tweet on Friday, Cohen referenced this article on Nordstrom Rack with a one-sentence response: “Shareholders want cost savings, not favoritism.”
Separately, the company recently added Eric Sprunk, former Chief Operating Officer of Nike, to its board of directors. This week it also named former Target executive Cathy Smith as its new chief financial officer.
Nordstrom shares reflect the lackluster performance. The stock is down about 6% so far this year, underperforming the 7% growth of the stock. S&P 500 and 1% gain from the retail-focused XRT. The stock closed at $15.13 on Thursday, about half its 52-week high.
Nordstrom will provide updates on its turnaround strategy when it reports results on May 31.
‘Golden moment’ for a discount
Nordstrom Rack, a brand aimed at bargain-hunting fashionistas, was founded in 1973. Now that the department store chain has closed some full-line stores, it has opened more of the off-price locations.
Nordstrom Rack stores outnumber the company’s namesake stores, with 241 locations across the country, according to the company’s filings. But other off-price names have higher sales and a larger footprint.
Jamie Nordstrom said the Rack stores are the retailer’s “biggest vehicle for acquiring new customers”. Customers who are younger and have less disposable income are often introduced to Nordstrom through the lower-priced chain and then move on to the more expensive store of the same name, 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 on March earnings call.
The stores are also a way to get merchandise off the full line, but still sell it profitably, Jamie Nordstrom said. Rack also buys from brand sales.
While it places its growth expectations 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 usually closer and more convenient than malls.
Other department stores have also expanded to off-price. 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 trying to juggle both types of stores, says Simeon Siegel, a retail analyst with BMO Capital Markets. Off-price retailers make money by being opportunistic. They pack eye-catching items from reputable brands that like to unload off-season or excess merchandise.
Retailers with full-price businesses can fall into the trap of using the stores to park their own parking lots merchandise that hasn’t sold and that few people want, he said. This can damage the shopping experience and the discipline of sellers.
“Off-price must have a maniacal focus on buying other people’s mistakes,” he said. “Not yours.”
Adrienne Yih, a retail analyst for Barclays, said Nordstrom Rack relied heavily on its department store merchandise in its early years. It doesn’t have the same muscle as long-lost prize players who have teams that pick up hot-ticket items quickly.
She called 2023 the price’s “golden moment” as many retailers and brands got stuck with a lot of extra inventory. Sophisticated buyers can get good merchandise for less.
“Knowing what to buy at what price may be more important in this environment,” Yih said.
Yih added that Rack is not the same width as off-price competitors, which have large categories such as household goods and food. In addition, Nordstrom risks stealing sales from its namesake company, she said.
Rack has a ‘long runway’
Jamie Nordstrom said a small percentage of Nordstrom Rack’s merchandise comes from the major stores. He declined to specify further. In addition to overbooking stores, it buys direct and closeout purchases from brands and has a number of Nordstrom-made products.
But he and other Nordstrom leaders acknowledged that the Rek had lost its way.
Jamie Nordstrom said the company has already taken steps to flip the off-price chain. It focuses on merchandise that customers want, including more expensive brands not typically found among off-price competitors. It rolled out a new logo and revamped the website.
Nordstrom Rack has also tapped a number of off-price veterans, including Nancy Mair, senior vice president of Rack merchandising, formerly of Burlington, and Kelly Wotton, Rack vice president and divisional merchandise manager, formerly of Macy’s Backstage and TJMaxx’s parent company TJX.
On the company’s website, Rack touts clothing, shoes, handbags, and more from brands like Vince, Kate Spade, and Ferragamo. Jamie Nordstrom said it should keep that fashion-forward approach sharp, along with emphasizing value.
“Our customers come first with the brand and then the price,” he said. “Wherever we went, with good intentions, we went first for price, then for brand. And our customers didn’t respond to that.”
Sales performance is stronger at the company’s three newest Rack stores, Chief Brand Officer Pete Nordstrom told investors on the March call. He called that a “point of evidence” when brands are hot and merchandise is fresh, shoppers respond.
As customers watch their budgets, Jamie Nordstrom said Rack is poised to take advantage. He called the post-Great Recession trajectory “the best run we’ve had in the modern history of our company.”
“We think that opportunity is right in front of us today,” he said.
He added that Nordstrom Rack’s footprint will grow. It has a small number of locations compared to TJX’s approximately 4,700 stores, Ross’s nearly 1,700 stores, and Burlington’s approximately 900 stores.
“Now that we’re finding great locations to open a Rack store, we’ll be very interested,” he said. “We think there’s a long runway.”