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Nordstrom pushes Rack expansion as full-line fleet contracts

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Dive Brief:

  • Nordstrom’s Q3 net sales fell 6.8% year over year to $3.2 billion, with gross merchandise value down 7.1%. The wind-down of its Canada business siphoned 270 basis points, while its anniversary sale timing added 200. Credit card sales grew 6.2% to $120 million, despite delinquencies above pre-pandemic levels.

  • By banner, full-line Nordstrom net sales fell 9.4%, with GMV down 9.8%. At off-price Rack net sales fell 1.8%. Digital sales fell 11.3% and represented 34% of total sales in the period.

  • Gross margin expanded 180 basis points to 35%, mostly thanks to lower markdowns, inventory productivity, and lower buying and occupancy costs. Ending inventory fell 8.8%. The company swung to net earnings of $67 million, from a $20 million net loss a year ago.

Dive Insight:

Like other retailers, especially department stores dependent on apparel sales, Nordstrom had a mixed quarter. Sales fell but margins recovered, and analysts noted some progress on inventory management.

But the company’s aggressive expansion of its off-price Rack business is prompting questions.

Number of Nordstrom stores
Store Number of locations
Nordstrom – U.S. 93
Nordstrom –  Canada 0
Nordstrom Local service hubs 6
ASOS | Nordstrom 1
Nordstrom Rack – U.S. 258
Nordstrom Rack – Canada 0
Last Chance clearance stores 2
Total 360

SOURCE: Nordstrom press release Nov. 21, 2023

Nordstrom opened 11 new Rack stores in the third quarter and another early in the fourth, bringing the total for the year to 19, CEO Erik Nordstrom told analysts in prepared remarks. Evercore analysts led by Michael Binetti noted that, after no net openings from 2018 through last year, 17 more new Racks are earmarked for 2024.

The openings have garnered “strong customer response” and positive feedback, according to Erik Nordstrom. In general, Rack stores are a great investment because they deliver returns above their capital cost, with a short payback period, and are the largest source of new customer acquisition, he said. The company expects Rack’s digital channel to be profitable for the year.

“We also know that our Rack customers value convenience, and we believe our stores are underpenetrated,” he said.

For a while, executives have maintained that, rather than cannibalizing the full-line stores, Rack actually delivers new customers to them, though several observers have been skeptical of that. William Blair analysts Dylan Carden and Alexander Vasti noted they didn’t do so on this call.

“[M]anagement seems to be moving away from calling out the synergistic nature of the two banners, which in our view puts it in even greater competition within the competitive off-price space,” William Blair wrote in a client note Wednesday.

That could be a problem. At a time when off-price retailers are thriving, thanks to consumers’ current penchant for good prices, Rack under-performs. Its year-over-year Q3 sales drop is a moderation of its recent quarterly declines, but, compared to 2019, sales fell 11.3%, according to GlobalData research. Nordstrom no longer breaks out comp sales for either of its banners, but Evercore analysts estimate that Rack comps have been negative for the last four quarters, including a 1% drop in Q3.

“Rack has been blessed by very favorable trends which have driven more shoppers into off-price. Because of this we attribute most of the weakness down to missteps with merchandising, customer communications, and the general management of stores,” GlobalData Managing Director Neil Saunders said in emailed comments. “Some of these problems are being remedied, including the assortment – which now contains a somewhat better line up of brands and compelling products. However, while this should be enough to push Rack back into growth, it will not be anywhere near sufficient to completely dig the brand out of the sales hole it has dug itself into.”

Analysts at Evercore and William Blair expressed concern about the pace of Rack store openings, with Evercore’s Binetti citing its negative comps as well as an evolving strategy there. In early 2021 the off-pricer began chasing more value-driven shoppers by “dramatically” expanding its price-driven merchandise, but by November that year walked that back as sales plummeted. The company has also recently shaken up Rack’s leadership a couple of times.

“We ultimately see risk of additional store closures, at both the full-line and Rack level, and question the logic of opening up more Racks given recent underperformance relative to the off-price space and lack of consistent performance,” William Blair analysts said.

In Q3, the company closed one U.S. full-line store and one Nordstrom Local. In 2020, 16 full-line locations also permanently closed. Nordstrom now runs 93 full-line stores (all in the U.S.), 258 Rack stores and six Locals. This paints a picture of a shrinking department store, with Q3 sales down 10.3% or $366 million compared to 2019, according to GlobalData’s Saunders.

“This underlines the degree to which the company has struggled to adapt to changing consumer tastes and the shifting landscape of the retail market,” he said. “Nordstrom has gone from being a business that was once held up as case study in good retail to one that is associated with the general malaise of the wider department store sector.

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