December 11, 2023

Signs are seen outside a Nordstrom Rack retail store in New York, U.S., Thursday, Aug. 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 as they juggle parties, holidays and office days.

But that didn’t help Nordstrom Rack, Nordstrom’s discount chain. The brand remains a weak link in the overall Nordstrom portfolio, with sales totaling $4.81 billion in the most recent fiscal year, below pre-pandemic levels. Net sales at Nordstrom Rack fell about 8% in the holiday quarter, slower than a roughly 2% decline at the company’s namesake brand.

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Despite Rack’s struggles, the Seattle-based department store operator is betting it can turn a laggard chain into a growth driver. It plans to open 20 stores this year — with more to come.

Nordstrom Rack has assembled a dedicated leadership team that includes some low-price veterans. It also strengthens the focus on best-selling and popular brands.

The success or failure of Nordstrom Rack’s turnaround could determine the company’s future. Even before the Covid pandemic, Nordstrom’s overall sales were stagnant.Discretionary goods are now under pressure from inflation and the cost of necessities is rising Pushing consumers more toward lower-priced brands.those chains like TJ Max, ross store and burlington storeMore stores were opened and new customers were attracted, resulting in higher traffic than Nordstrom Rack had ever seen.

Meanwhile, Nordstrom is bracing for a drop in sales. The company said in March that it expected revenue this fiscal year to fall 4% to 6% from the previous year. This includes the impact of its recent decision to close its stores and online presence in Canada.

Company leaders blamed specific problems at Nordstrom and a tougher economy for the slowdown in sales.

In an interview with CNBC, Chief store officer Jamie Nordstrom said Rack stores had been hit by inventory issues during the pandemic.Shelves oscillate between too many items and too few. Too many items come from brands that fashion-forward shoppers don’t recognize, he added.

“If you walk into Nordstrom Rack, you’re looking at a brand you’ve never heard of. It’s probably not something our customers want,” he said. “If I go into a shelf store — and I’ve been in this industry my whole life — if there’s a brand that I’ve never heard of,[it’s]probably not a good brand. That’s what we’re solving.”

CEO Erik Nordstrom says Shoppers have also become more indecisive. He said on a conference call with investors in March The retailer saw shoppers spend less in late June and throughout the holiday season. The trend was more pronounced among Rack and lower-income customers than at the chain’s flagship stores.

He said a little more than half of Rack’s sales decline in the fiscal fourth quarter was due to actions the company took to boost profits. These include taking steps to eliminate store-based online order fulfillment and raising the minimum amount people must spend online to get free shipping.

In the company’s most recent letter to shareholders, Erik Nordstrom acknowledged the company’s poor performance over the past year. Boosting Nordstrom Rack sales is one of his top priorities, he said.

Digital sales could give Rack an advantage: Lower-priced players are slower to move online as they focus on in-person treasure hunts.

However, according to the, to track retail foot traffic. For example, in April, store traffic at Nordstrom Rack was down nearly 16% year-over-year, while traffic at TJMaxx and Marshalls were both up about 3%. Store traffic was down about 7% year-over-year in April in Ross and about 3% in Burlington.

However, store traffic doesn’t reflect how much shoppers take with them when they leave, or how much they buy online at home.

Nordstrom’s struggles have drawn attention.Activist investor Ryan Cohen, Chairman game stop and founder chewy, bought a stake in the company earlier this year through his investment firm RC Ventures. He has been pushing for changes at the company as sales have stagnated.

Cohen withdrew his proposal to nominate two candidates for Nordstrom’s board, but kept options open — including re-proposing a board replacement, according to people familiar with the matter.

Cohen declined to comment. Nordstrom also declined to comment on the rights controversy, but said in a statement that the company “remains focused on executing its strategy and driving long-term profitable growth and value creation.”

Separately, the company recently added former Nike COO Eric Sprunk to its board. This week, it also named former Target executive Cathy Smith as its new chief financial officer.

Shares of Nordstrom reflected its lackluster performance.The stock is down about 6% so far this year, underperforming a 7% gain S&P 500 Index and a retail-focused 1% gain XRT. Its shares closed at $15.13 on Thursday, about half their 52-week high.

Nordstrom will provide an update on its turnaround strategy when it reports earnings on May 31.

The “golden hour” of discounts

Founded in 1973, Nordstrom Rack is a brand that caters to the bargain-hunting fashionista. As the department store retailer closed some full-line stores, it opened more discount stores.

Nordstrom Rack has more stores than the company’s namesake, with 241 stores nationwide, according to company filings. But other lower-priced brands have higher sales and larger footprints.

Jamie Nordstrom said Rack stores are the retailer’s “biggest single channel for acquiring new customers.” Jamie Nordstrom said customers who are younger and have less disposable income are often introduced to Nordstrom through the lower-priced chain and then move to the pricier namesake stores. He added that Nordstrom customers tend to buy both brands.

Nordstrom Rack stores will account for more than 40% of new customers by 2022, CEO Erik Nordstrom said on a March earnings call.

The stores are also a way to move merchandise out of its full-line business but still sell it profitably, Jamie Nordstrom said. Rack also buys from the brand’s clearance sale.

As it pins its growth hopes on low-priced locations, Nordstrom is also turning Rack stores into e-commerce centers. Customers can pick up and return items at Rack locations, which tend to be closer and more convenient than mall stores.

Other department stores have also expanded into discounting. Names like Saks Off Fifth and Macy’s Backstage fit the growing emphasis on lower-priced items.

However, retailers will face built-in pressure if they try to juggle both types of stores, said Simeon Siegel, a retail analyst at BMO Capital Markets.Off-price retailers make money through opportunism. They snap up compelling merchandise from established brands eager to sell out-of-season or surplus merchandise.

Retailers with full-price businesses can fall into the trap of using stores to park themselves Those items haven’t sold yet, and very few people want them, he said. This can harm the shopper experience and merchant discipline.

“Low prices require an insane focus on buying other people’s mistakes,” he said. “It’s not yours.”

In the early years, Nordstrom Rack relied heavily on merchandise from its department stores, said Adrienne Yih, a retail analyst at Barclays. It doesn’t have the strength of long-term low-priced players whose teams can snap up hot items quickly.

She called 2023 a “golden moment” for price cuts, as many retailers and brands are stuck with a lot of extra inventory. Sophisticated buyers can get great merchandise for less.

“In this environment, it may be more important to know what to buy at what price,” Yih said.

Yih added that Rack’s breadth is different from lower-price competitors, which have big categories like home goods and food. Plus, Nordstrom runs the risk of stealing sales from its namesake business, she said.

The rack has a “long runway”

Jamie Nordstrom said a small portion of Nordstrom Rack’s merchandise comes from its larger stores. He declined to elaborate further. In addition to moving from stores, it also buys direct and clearance from brands and sells some Nordstrom-made products.

But he and other Nordstrom leaders acknowledged that Rack had lost its way.

Jamie Nordstrom said the company had taken steps to reverse the discount chain. It focuses on the items customers want, including high-end brands not usually found among lower-priced competitors. It rolled out a new logo and updated its website.

Nordstrom Rack has also hired some low-cost veterans, including Nancy Mair, senior vice president of shelf merchandising, formerly of Burlington & Co.; Kelly Wotton, vice president and division merchandising manager of Rack, who worked in the back office of Macy’s and TJX, TJMaxx’s parent company.

On the company’s Web site, Rack touts clothing, shoes, handbags and more from brands such as Vince, Kate Spade and Ferragamo. It had to maintain a fashion-forward approach while emphasizing value, says Jamie Nordstrom.

“Our customers are brand first and price second,” he said. “Where we go – out of goodwill – we think about price first, brand second. Our customers don’t respond to that.”

Chief brand officer Pete Nordstrom told investors on a March conference call that sales were stronger at the company’s newest three Rack locations. He called it “evidence” that shoppers respond when brands are hot and items are fresh.

Jamie Nordstrom says Rack is poised to benefit as customers focus on their budgets. He called the period after the Great Depression “the best period in the modern history of our company.”

“We thought the opportunity was in front of us today,” he said.

Nordstrom Rack’s footprint will expand, he added. Its location is small compared with TJX’s roughly 4,700 stores, Ross’s nearly 1,700 stores and Burlington’s roughly 900 stores.

“When we find a great location for a Rack store, we’ll be very interested,” he said. “We think the runway is long.”