Should Nordstrom spin off Nordstrom Rack?

Discussion
Photo: Nordstrom
Dec 22, 2021

Nordstrom has reportedly retained AlixPartners to explore a spinoff of its recently-struggling Nordstrom Rack off-price business.

The move, first reported by Bloomberg, follows Saks Fifth Avenue’s hiring of AlixPartners earlier this year to explore a separation of its online business. Saks.com is expected to undergo an IPO in 2022.

Macy’s and Kohl’s are both facing shareholder pressure to similarly spinoff online operations. Activist shareholders are betting online spinoffs will fetch higher valuations.

A Rack spinoff may likewise take advantage of the premium stock multiples in recent years afforded to faster-growing off-pricers versus traditional department stores.

Nordstrom Rack, positioned as a more upscale off-pricer, in recent years has been Nordstrom’s primary growth vehicle, alongside its online business.

Should Nordstrom spin off Nordstrom Rack?
Photo: Nordstrom

The spinoff, however, would come at a time when Rack is struggling to regain momentum during the pandemic. In the third quarter, sales at Rack fell 8 percent vs. the same period in 2019, while its namesake department store rose 3 percent. On the same two-year basis, same-store sales rose 14 percent at both TJX Cos. and Ross Stores and 16 percent at Burlington Stores.

CEO Erik Nordstrom said on an analyst call that Nordstrom was “not satisfied at all” with Rack’s performance. Racks’ inventories have been “significantly under” plan and, in particular, short on the premium brands Mr. Nordstrom described as “the juice that gets customers excited to come to Rack.”

Procuring 90 percent of the top brands sold at Nordstrom for Rack also creates a challenge for the chain. He said, “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.”

Rack is increasing pack-and-hold inventory by a factor of two to three times and sourcing new brands to overcome the shortages.

Simeon Seigel, at BMO Capital Markets, told Business Insider he believes brands would rather sell to an off-pricer such as TJX with minimal e-commerce presence because their product can’t be easily found online.

He further believes Nordstrom’s overall margin dynamics are impacted by Rack ownership. Mr. Seigel told Insider, “It’s hard to operate as an off-price unless the company is strictly focused on off-price buying. TJ Maxx doesn’t sell cheap clothing, they sell expensive clothing cheap.” 

DISCUSSION QUESTIONS:  Do Nordstrom and Nordstrom Rack make more sense together or apart? What do you suspect is driving the recent subpar results and inventory procurement challenges at Nordstrom Rack?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Spinning off the business will not automatically correct the issues but it may allow for better, more focused management of the division. "
"I agree that something has to be done when sales are down, but I doubt the answer is to become indistinguishable from all the other dedicated off-brand retailers."
"Interesting question, but let’s look at it in a slightly different way. Does a gangrenous arm suddenly heal itself when it has been amputated to save a patient’s life?"

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17 Comments on "Should Nordstrom spin off Nordstrom Rack?"


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Mark Ryski
BrainTrust

The Rack concept made perfect sense when it first appeared in 1973 to quietly sell high-end goods at a discount. And Nordstrom had great success with the model. However the off-price market is a powerhouse and, given the struggles that Nordstrom has had in re-gaining traction at Rack, it’s a reasonable for them to explore options. It’s difficult to say exactly what might be the key issue with Rack’s performance, but I’d say it has a lot to do with the powerhouse results and scale of the players in the off-price market, namely TJX and Ross.

Neil Saunders
BrainTrust

Neither Rack nor Nordstrom’s full-price department stores are working properly. However the underperformance of Rack is both hefty and chronic. Spinning off the business will not automatically correct the issues but it may allow for better, more focused management of the division. One of the biggest things to remedy is to bring back a dedicated buying team with a full understanding of what off-price is about. This lack of expertise over the past couple of years has seriously damaged Rack and has led to most stores carrying odd assortments that are out of tune with what their shoppers want. As for comparing this separation to e-commerce splits, it is entirely different since the brands are distinct both operationally and in the mind of the shopper.

Liza Amlani
BrainTrust

Nordstrom should not spin off Rack due to an inventory issue. In fact the banners should be working more closely together on their merchandising and inventory management strategies.

The fact this is even being considered tells me they operate in silos which is a massive problem across retail.

Imagine if the banners worked together on buys and category merchants also had long term visions on excess from their vendors. Managing vendor relationships is part of the merchants’ role and the better the relationship, the more they would trust you with a liquidation strategy. Nordstrom Rack wouldn’t devalue a luxury brand like other off-price retailers.

DeAnn Campbell
BrainTrust

The pandemic has forced an overhaul of supply chain processes and relationships across the entire retail industry. And at the same time we have advances in technology that enable inventory tracking and customer personalization at unprecedented levels. This means Nordstrom has the means to do a better job of selling through their inventory without the need for discounting, leaving fewer leftovers for Nordstrom Rack. All discount retailers are having a harder time obtaining high-end stock to sell, one has only to look at the depleted Runway section of TJX stores to see this trend in action. Many discount retailers have resorted to commissioning clothing directly from manufacturers like Michael Kors, shifting their business model into one of a low price department store rather than an off-price reseller. While I don’t see Nordstrom Rack surviving on its own, it does seem like the right move for Nordstrom to help them retain focus on their core business rather than reinventing their discount model.

Christine Russo
BrainTrust

My perspective is that department stores are looking to break up their businesses like this or split out e-commerce for a few reasons:

  • To garner Wall Street analyst attention (no news is bad news on Wall Street);
  • To shed the industry view that department stores (and thus their stock price) are stagnant;
  • As a distraction from the dismal core business metrics.
Gene Detroyer
BrainTrust

Pretty cynical but a correct observation.

Craig Sundstrom
Guest

If that’s their goal, then reason #3 seems to refute reason #2.

Gene Detroyer
BrainTrust

Once upon a time these off-price outlets provided a true bargain for shoppers. They were filled with left-overs and seconds from the namesake retailer. But then popularity outpaced the left-overs and seconds and the retailers started filling the stores with lesser quality product specifically for the outlets in order to hold margins.

It took years for the consumer to catch onto the change, but maybe today they are. Off-price is no longer a bargain, but just a lower priced, acceptable quality option.

The problem Nordstrom has with spinning off Nordstrom Rack is the name. If I were to do it, part of the deal would be eliminating the Nordstrom name. Not having control of one’s brand name carries a high risk. So let’s call it The Rack. Then what do we have?

Bob Amster
BrainTrust

If the Rack is not doing well, what is the advantage in spinning it off now? Where is the value? If Nordstrom is jumping on the spin-off wagon because others are, it’s a poor reason. If the two businesses are operating as silos, Nordstrom should eliminate the silos so that what is sold in the Rack is, in fact, what was being sold in the full-line stores, at a lower price. If product availability is the problem, you are not going to fool the consumer by selling at the Rack what was never a full-line item.

Jeff Sward
BrainTrust

This is a tricky one. Under normal (historical) circumstances I’d say that they would perform better under one roof, leveraging the regular price relationship with better vendors to get access to excess inventory. Normal is now relegated to the history books. Brands and retailers alike are going to be tightening inventories. And many better brands are figuring out that they aren’t doing themselves any favors by selling the off-price retailers. I’m not talking about end of season residual inventory. I’m talking about the made-to-order product that is manufactured and sold to the off-price retailers in order to feed the sales beast. Sure, that’s what the customer wants, but is it the long term jealous thing for the brand and retailer? I’m surprising myself with this comment, but at this point I’d say separate them and run them each as the distinctly different models they are.

Ryan Mathews
BrainTrust
Interesting question, but let’s look at it in a slightly different way. Does a gangrenous arm suddenly heal itself when it has been amputated to save a patient’s life? Many of the “hard” (supply chain disruption, etc.) and “soft” (changing consumer life and work styles) issues plaguing Rack are, in fact, pandemic-related and may go away when – or if – COVID-19 is contained. But a.) nobody actually knows when the COVID-19 train will finally run out of steam, and b.) by the time Rack is trimmed down enough to make it attractive to PE players there won’t be much of a business left. Also, without the Nordstrom brand affiliation, Rack – by any other name – is just one more discounter, and a currently failing one at that. Beyond this, what does this mean for Nordstrom’s other businesses? Will the online business be the next to go? And how does any of this help Nordstrom solve its larger brand challenges other than buying it a little more time by (hopefully) giving it a temporary… Read more »
storewanderer
Guest
7 months 25 days ago

They overexpanded the concept. It worked as an annex of sorts near larger Nordstrom stores where the nearby store just “fed” its clearance items to the Rack stores. People loved the great finds and new merchandise was showing up steadily.

As Rack got larger and they had to procure more merchandise special just for the Rack format, that is where they fell off track. Some good stuff kept being seeded in but there is a lot of stuff that is at a level of Kohl’s or similar.

This concept never should have been used as an expansion vehicle into new markets without full size Nordstrom stores. It has seriously watered down and compromised the reputation of Nordstrom.

What happened to their smaller format personalized stores they were talking about?

Craig Sundstrom
Guest

I didn’t see a single word here that argues for this idea; indeed the few tangible phrases offered — “retained” (for what should be a basic decision a large firm can make itself) and “activist” are flashing red lights. One part of a business is (momentarily) doing worse than the other? Gee: imagine that!

Nordstrom should take a lesson from one of retail’s most well known spin-offs: Target…it eventually led to the (effective) end of the parent.

James Tenser
BrainTrust

Well if my most recent visit to a local Nordstrom Rack store is any indication, it’s on the brink of failure anyway. I could not believe how utterly disappointing the assortment was. Quite a contrast to a few years ago, when I was able to purchase high-quality suits, shoes and sportswear — not cheap, but at attractive discounts.

As I see it, Nordstrom faces a dilemma. Either it formulates a strategy for operating its whole business with synergy and purpose, or it hacks off the diseased limb (thanks for the metaphor, Ryan).

Incidentally, we have been hearing in recent months of over-buying by apparel retailers in attempts to offset supply chain delays. They also have been leasing more warehouse space to store the anticipated excess inventory in the coming year. That should present a bonanza for off-pricers, including N.Rack. Maybe the board should pause and consider that a rebound is possible?

Carlos Arambula
BrainTrust

The article lists reasons why activist shareholders want to spin off Rack but it misses the consumer perspective.

How do consumers view Nordstrom Rack vs Nordstrom? How do consumers view the Rack vs TJX Cos., Ross Stores and Burlington Stores? Are core consumers the same at the Rack and the aforementioned off-price retailers?

I agree that something has to be done when sales are down, but I doubt the answer is to become indistinguishable from all the other dedicated off-brand retailers.

MattP
Guest
7 months 25 days ago

Definitely think they should spin off the rack business. It was a perfect concept when they first used it to sell actual excess inventory from the full-line stores, but now it’s just a discount chain, offering lower prices and lower quality products. It should become its own off-price business now. Nordstrom can still use their leverage and relationships to continue to build The Rack business.

Bill Hanifin
BrainTrust

The spin off of e-commerce arms of retailers (Kohl’s, Saks, etc.) is motivated by investors who see a financial opportunity. I don’t believe they take a long term view of the impact on the overall business but are happy to enjoy the payday resulting from the transaction.

This discussion is different. Nordstrom may have lost some flash and Rack is struggling. Applying financial machinations to the business does not address fundamental business issues. If Rack is in dire straits as described, maybe a divestiture would make more sense than just a “spin off.”

wpDiscuz
Braintrust
"Spinning off the business will not automatically correct the issues but it may allow for better, more focused management of the division. "
"I agree that something has to be done when sales are down, but I doubt the answer is to become indistinguishable from all the other dedicated off-brand retailers."
"Interesting question, but let’s look at it in a slightly different way. Does a gangrenous arm suddenly heal itself when it has been amputated to save a patient’s life?"

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