Should Nordstrom spin off Nordstrom Rack?
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.
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.”
- Nordstrom Taps Adviser for Potential Spinoff of Its Rack Business – Bloomberg
- Nordstrom Reports Third Quarter 2021 Earnings – Nordstrom
- Nordstrom (JWN) Q3 2021 Earnings Call Transcript – Motley Fool
- Nordstrom Sets a ‘Closer to You’ Long-term Growth Agenda – WWD
- Nordstrom is reportedly considering spinning off discount store Nordstrom Rack. Analysts describe it as a mess that’s dragging the brand down and couldn’t keep up with TJ Maxx. – Business Insider
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?