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 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.”
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?
Comments from the RetailWire 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.
Mark Ryski, Founder, CEO & Author, HeadCount Corporation
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.
DeAnn Campbell, Chief Strategy Officer, Hoobil8
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?
Gene Detroyer, Professor, International Business, Guizhou University of Finance & Economics; Executive Director, Global Commerce Education
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 cash infusion? As we’ve learned during the pandemic the problem with a quick and convenient shot in the arm is that it doesn’t protect you forever.
Ryan Mathews, Founder, CEO, Black Monk Consulting
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?
James Tenser, Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
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