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How Is Nordstrom Rack Performing?

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Off-price business

Nordstrom’s (JWN) off-price business is comprised of Nordstrom Rack, Nordstromrack.com, and HauteLook. The company’s full-line business consists of its namesake full-line stores and Nordstrom.com. In Part 2 of this series, we saw that the company’s off-price business delivered a higher sales growth in the 2017 holiday season than its full-line business.

Nordstrom’s off-price business attracts new customers through its clearance deals. That business, its largest source of new customers, added about 6 million customers in 2016. In recent years, Nordstrom has focused more on the expansion of its Rack store base than its full-line stores. As of October 28, 2017, Nordstrom operated 117 full-line stores in the United States, six full-line stores in Canada, and 232 Nordstrom Rack stores in the United States. The company plans to launch Nordstrom Rack stores in the Canadian market this spring, starting with Calgary and Toronto.

To take advantage of the opportunities in the off-price retail space, rival department store Macy’s (M) is expanding the presence of its Macy’s Backstage stores.

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Performance in recent quarters

As you can see in the above graph, sales growth for Nordstrom Rack stores has decelerated over the past few quarters. Same-store sales of Nordstrom stores have also been declining in recent quarters.

In fiscal 3Q17, which ended on October 28, 2017, sales for Nordstrom Rack (including stores and online channels) rose 5.5% to $1.2 billion. Sales for just the Nordstrom Rack stores rose only 0.8% to $966 million. Same-store sales at Nordstrom Rack stores fell 5% in fiscal 3Q17. Same-store sales growth is a key retail metric that reflects the change in sales of existing stores, ignoring the impact of stores opened or shut down during a certain period.

The company indicated that fiscal 3Q17 same-store sales of Nordstrom Rack’s physical locations declined due to the lack of newness in merchandise. Due to an aggressive sales plan at the start of fiscal 2017, the company had an inventory overload in the third quarter. That impacted its flexibility to provide fresh merchandise at its off-price stores.

Investors will get more clarity on the performance of Nordstrom Rack’s physical locations when the company announces its fiscal 4Q17 results on March 1, 2018.

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