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- Nordstrom is considering spinning off its Rack brand, Bloomberg reported.
- Once considered the company’s greatest asset, sales growth has slowed at Rack in recent years.
- Analysts say Rack has an inventory problem and suffers by being connected to a full-price brand.
Two years ago, Nordstrom’s discount chain Nordstrom Rack was described as the company’s greatest asset, outperforming and outgrowing its full-price business in sales and store locations.
Fast-forward to today and the discount channel has become a lag on Nordstrom’s earnings, reporting an 8.1% drop in sales over 2019 in the most recent quarter while rivals TJ Maxx and Ross Stores continue to thrive.
While management addressed Rack’s weakness in recent earnings calls and laid out steps to turn it around, reports on Monday revealed that it has more drastic plans for the brand: Nordstrom could spin it off entirely, Bloomberg reported.
The off-price channel has experienced strong sales growth in the period since the last recession. Customers have flocked to these stores for deals and discounts and value the treasure hunt shopping experience that’s hard to replicate online.
But Nordstrom Rack has fallen behind.
In the second quarter of 2021, revenue fell 8% at Nordstrom Rack versus 2019. Meanwhile, TJ Maxx and Ross saw sales jump by 23.5% and 19.9% respectively versus the same quarter two years ago as shoppers returned to stores as restrictions eased.
In its most recent earnings, CEO Erik Nordstrom said Nordstrom was not “satisfied at all” with Rack. “Clearly our recovery is lagging what we think it should be,” he said.
Part of this is down to supply chain constraints, he said, which make it harder to secure inventory.
“Rack faces a unique challenge as off-price procurement of the same top brands we carry at Nordstrom is particularly difficult in an environment with production constraints and lower levels of clearance product,” he said.
His solution? To add new vendors and buy items in larger quantities so the store can hold on to the stock and save it for a rainy day when demand is high and the supply chain is challenged.
But analysts say its problems run deeper than this. Nordstrom didn’t immediately respond to Insider’s request for comment.
“The assortment has become very disjointed and out of tune with what shoppers want,” GlobalData Retail analyst Neil Saunders wrote in an email to Insider.
‘There is a huge volume of inventory and seemingly no discipline in buying – it’s almost as if Nordstrom just acquires lots of stuff which it then shoves into stores,” Saunders said. “No one expects off-price retailers to be the neatest, but a great deal of skill is required in picking the right brands and products that customers want.”
In a note to clients in November, Saunders described Rack’s stores as a “mess.”
Nordstrom is in a more challenging position than TJ Maxx or Ross because it operates full-price stores too, Simeon Seigel, an analyst at BMO Capital Markets, told Insider.
“It’s hard to operate as an off-price unless the company is strictly focused on off-price buying,” he said. “TJ Maxx doesn’t sell cheap clothing, they sell expensive clothing cheap.”
Meanwhile stores like Macy’s or Nordstrom can use this channel as an outlet to sell leftover products from full-price stores, which changes the margin dynamic, Seigel added.
Rack may also be at a disadvantage when it comes to securing new inventory because of the strength of its online platform, Seigel said.
“Brands prefer the invisible sale done at TJ Maxx,” said Seigel. |If you are a brand looking to move product through off-price, seeing it online is a different proposition to believing you can drop boxes off at a TJ Maxx without anyone knowing.”
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