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Nordstrom Rack Stores: The Strength behind the Strategy in 1Q15

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10 Nordstrom Rack stores open in 1Q15

In the first quarter of 2015 ending May 2, 2015, Nordstrom (JWN) opened ten Nordstrom Rack stores. It opened only two full-line stores that quarter. At the Piper Jaffray Consumer Conference on June 9, Mike Koppel, Nordstrom’s chief financial officer, told how the Nordstrom Rack stores have evolved into a strong channel for the company. Nordstrom initially opened its Nordstrom Rack stores to take slow-moving products out of its regular price full-line stores, sell them at substantial discounts at Nordstrom Rack stores, and keep new products moving into the full-line stores.

In fiscal 2014, which ended January 31, 2015, Nordstrom Rack stores delivered sales per square foot of $552, which was higher than $371 delivered by the US full-line stores. In fiscal 2014, Nordstrom Rack brought in four million new customers.

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Sales for Nordstrom Rack beat full-line stores

Nordstrom Rack stores have performed consistently in recent years. In contrast, Nordstrom’s full-line stores have struggled over the past two fiscal years. In fiscal 2014, Nordstrom Rack sales rose 17.4% to $3.2 billion, while Nordstrom full-line store sales fell 0.3% to $7.7 billion. Even after considerable improvement in US economic conditions, consumers continue to resort to bargain-hunting at the off-price Nordstrom Rack stores.

The discount deals offered at off-price Nordstrom Rack stores and retailers like TJX Companies (TJX) and Ross Stores (ROST) have helped them perform better than department stores. Department stores account for 6.0% of the portfolio holdings of the SPDR S&P Retail ETF (XRT).

Early mover advantage

Nordstrom entered the off-price space with its first Nordstrom Rack store in 1973 in Seattle, Washington. Upscale department store Neiman Marcus opened its off-price store Last Call Studio in Dallas, Texas, in 2010. Macy’s (M), the largest department store in the United States, is all set to make its entry in off-price retailing with the planned opening of six Macy’s Backstage stores in fall 2015. Nordstrom’s entry in off-price retailing more than four decades ago gives it an early mover advantage compared to other department stores.

In the next part of this series, we’ll explore Nordstrom’s significant growth in online retailing.

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