Nordstrom Rack bets on premium merchandise in the face of rising prices
Nordstrom Rack sales were up six percent in the second quarter. That’s the good news. The bad news is that sales at Nordstrom’s off-price chain started to go south towards the end of the quarter.
Erik Nordstrom, CEO of Nordstrom, said last week on the company’s earnings call, that the retailer had not been adversely affected by macroeconomic pressures during the first quarter and most of the second. He attributed that to the “higher income profile” of the retailer’s customer base.
“This continued through most of the second quarter until late June, when demand began to soften, mostly in Nordstrom Rack. Compared to the first two months of the quarter, July sales decelerated nine percentage points in the Rack banner,” said Mr. Nordstrom. “Across both banners, the softening trend was more significant in customer segments with the lowest income profiles.”
Nordstrom is seeking to make Rack more attractive to consumers by upgrading its merchandise selection. The retailer in recent years brought in lower priced merchandise to gain entry point consumers but found that Rack’s customers were looking for deals on the same goods sold in Nordstrom’s department stores. Ninety percent of the brands sold in Nordstrom’s full price locations are found in Rack stores.
“Premium brands are a differentiator for the Rack, and we are focusing on having the best brands at the best prices at each of our locations,” said Mr. Nordstrom. “This quarter, sales of our top 100 brands at the Rack increased 17 percent, which underscores the opportunity from increasing our supply of premium brands.”
Nordstrom Rack is actively looking to bring in premium brands and clear out sub-premium merchandise. The retailer expects that this will put pressure on its margins for the second half of the year, although management still expects to post an increase in year-over-year profits when all is said and done.
Mr. Nordstrom said that Rack plays an integral role in the company’s fortunes.
“Our [Closer to You] strategy provides customers convenience, connection and access to the best product selection through a strong store fleet, two unique banners and omnichannel capabilities linked at the market level,” he said.
Nordstrom has been scaling Closer to You, he added, “by expanding next-day order pickup capabilities to more than 60 additional Rack stores in our top 20 markets. And our top 20 markets outperformed our other markets by seven percentage points.”
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DISCUSSION QUESTIONS: Do you lump Nordstrom Rack with other off-pricers (TJX, Ross, Burlington, et al) or do you see it falling into another category? Do you expect Nordstrom’s department stores to continue to outperform Rack for the rest of 2022 or will that change?