After reportedly mulling a spinoff of its off-price Rack business, Nordstrom is now pinning its growth ambitions on it, CEO Erik Nordstrom said during the Telsey Advisory Group fireside chat on Tuesday.
That will entail a brick-and-mortar expansion at the off-price banner, which he said is more dependent on physical locations than the full-line business. In recent years, Nordstrom took steps to enlarge its Rack fleet, then hit the brakes. But after internal research showed that off-price shoppers aren’t likely to drive more than about 15 to 20 minutes to access a Rack store, the company decided to resume that effort, Nordstrom said. The company, which runs about 250 Rack stores, will open four new Rack locations next year, with plans for more, he also said.
“People don't go as far for the off-price business, so having that convenience is super important,” he said. “But we are cranking up that store-opening engine again and we're excited about it.”
In the most recent quarter, Rack sales grew 10.3% year over year, but fell 3.6% compared to 2019, continuing what GlobalData Managing Director Neil Saunders last month called “a chronic underperformance compared to peers.”
The company is banking on continued improvement at Rack, and taking steps to integrate it more fully into what it calls its market strategy. Some analysts see risk in that approach, warning that as Rack gets bigger and better, the full-line business loses its appeal.
But Nordstrom has long valued the synergies the company says it gets from connecting its e-commerce, full-line, Local and Rack stores, and Erik Nordstrom on Tuesday said it will continue to work to strengthen those ties. More Rack stores are set to serve as pickup and return spots for e-commerce orders, including Nordstrom.com purchases, in part because they bring new customers to Rack, he said.
“People don't go as far for the off-price business, so having that convenience is super important. But we are cranking up that store-opening engine again and we're excited about it.”
Executives are probably breathing a little easier having addressed much of the inventory upheaval that undermined the Rack business last year. On Tuesday Erik Nordstrom and Chief Financial Officer Anne Bramman described a still-choppy supply chain, but assured analysts that the flow of optimal inventory is much better, leading to sequential improvements in recent quarters.
“We had both quality and content issues through the pandemic with the Rack, and they're related,” Erik Nordstrom said. “The real key to Rack, and our Northstar, is having coveted brands at great prices. And when I say coveted brands — it's brands, a lot of them, that customers see in our Nordstrom channel, but also brands that they see out there. When we have access to these brands they give us a fairly unique product offering, and [that] access to those brands was hampered during the pandemic.”
They largely skipped over the company’s own missteps, after last year’s decision to bring in cheaper merchandise backfired, though Erik Nordstrom said that Rack has since narrowed its focus to offering “those coveted brands at great prices.”
Maximizing profits for the entire company depends on optimal pricing, especially at Rack, where there is more flexibility because it’s not beholden to the MSRP limits seen at full-line Nordstrom, Bramman said. There’s been little resistance from customers since the company began testing price bumps “on certain items and key categories,” she said. That’s in part because the company — both its full-line and off-price business — enjoys the attention of a wealthier customer base that appears to be less rattled by inflation, Erik Nordstrom said.
In a client note Tuesday, Telsey analysts called Rack’s improvements essential, and agreed that a focus “for increasing profitability is improving trends at Nordstrom Rack.” The company’s overall results of late have been encouraging, but “visibility [is] still challenging against macro pressures in the space,” analysts led by Dana Telsey also said.