Nordstrom pins hopes on its discount stores
Amid declining revenue, retailer focuses its efforts on off-price Rack outlets
NEW YORK— With its buyout plans on hold, Nordstrom Inc. is under intense pressure to find answers to the department-store slump.
Key to that effort is reviving what was once a long-time bright spot for the chain: Nordstrom Rack. The discount stores had been helping the company cope with a slowdown at its full-price formats, but now they are in need of their own jump-start. Same-store sales and traffic have stalled at Nordstrom Rack this year.
The job of shoring up Nordstrom Rack falls to longtime Nordstrom executive Karen McKibbin, who is debuting the chain’s latest store this week in New York City’s Herald Square neighbourhood, just blocks from the iconic Macy’s Inc.
The location features gender-neutral fitting rooms and mobile checkout via an updated app — an attempt to make convenience a centrepiece of the brand.
“We’re doubled down on speed and experience,” McKibbin said in an interview. “We really see it as complementary.”
The 47,000-square-foot location, which sprawls over three floors, comes ahead of the crucial holiday shopping period and as department stores fight for a shrinking base of customers that are increasingly focused on value. Pricey financing The company is reassessing its options after the controlling members of the Nordstrom family suspended efforts to take the company private as lenders sought interest rates that were about twice what similarly rated, non-retail businesses pay. If the company wants to revive the idea of going private, improved performance will be needed.
With foot traffic in malls and Nordstrom’s full-line department stores still declining, the burden may fall increasingly to the Rack, which already generates about a third of the company’s revenue. Two-thirds of all consumers shop off-price, according to an NPD Group study released in 2016. Last quarter, the combined offprice division brought in almost $1.2 billion (U.S.) in net sales, $990 million of which came from the Rack stores.
“They’ve got a good website and then they’ve got the brand name which means something,” said Bridget Weishaar, an analyst at Morningstar. If Nordstrom seeks a buyout again in 2018, the Rack should help, she said.
The chain has evolved since 1973, when Nordstrom wheeled its offprice offerings into the basement of its first department store in Seattle on a rolling rack. (Hence the chain’s name.) Customers responded, but struggled to build entire wardrobes, so the company added closeout products to expand the assortment.
Nordstrom began opening free- standing Rack stores in 1983, and by the end of this year, there will be 232 locations around North America. Off-price popularity In the past 20 years, off-price shopping has grown significantly. T.J. Maxx entered the market in 1976, and is now seen as the dominant player, competing with apparel retailers of every kind. For Nordstrom, the format has drawn in new customers as well as boosting sales.
But as off-price demand has surged, so has competition. The Rack contends with rivals from Burlington Stores and Ross Stores to Saks Off 5th and Macy’s Backstage. Shoppers are savvier than ever and understand how to find value in the off-price game, said Ed Yruma, an analyst at Keybanc.
Along with increased competition, full-price apparel retailers and brands are offering less merchandise in an effort to control inventories and reduce the number of products that ultimately get marked down or go to off-price stores.
The recent results haven’t been stellar. Comparable-store sales at the Rack have declined in seven of the last 10 quarters, including the last three. In the same period, online sales surged. Some of those sales and new stores, like the new Manhattan location, could be cannibalizing older Rack locations, Yruma said. Higher prices Part of the Rack’s appeal is the designer brands it carries. The store sells 48 of Nordstrom’s 50 bestselling brands, McKibbin said. But its relatively premium pricing could be part of the problem, said Jan Kniffen, founder of the consulting firm J. Rogers Kniffen Worldwide Enterprises in New York.
Other high-end department stores have stumbled in their value-focused offerings. Hudson’s Bay blamed declining traffic for falling comparable sales at its off-price banners last quarter. In September, Neiman Marcus announced it would close more than 25 per cent of its outlet stores to focus more on full-price sales.
“There’s reason to believe there’s a sector issue, that off-price growth is slowing some,” Kniffen said “The Rack is relatively expensive — it’s better stuff, but they’re a higher price point and that’s not where the consumer is.”
Still, Kniffen said he doesn’t expect the Rack to change its strategy.
As a whole, comparable sales at Nordstrom’s off-price business including online has grown by more than 2.3 per cent for the last six quarters. The segment posted comparable sales that increased 3.1 per cent last quarter, compared with a 3 per cent gain at TJX Cos.