Nordstrom Rack is viewed as a long-term growth opportunity.
Nordstrom Sets a ‘Closer to You’ Long-term Growth Agenda The Seattle-based upscale retailer expects to see digital sales settling in at approximately 50 percent of total revenues in the years ahead.
By David Moin on February 4, 2021 wwd
Courtesy Nordstrom Inc. is “widening the aperture” of who it serves. The retailer is doing it by broadening its digital assortment from 300,000 items to potentially 1.5 million over the next three to five years; injecting lower price offerings into the Nordstrom Rack off-price matrix, and extending the reach of its three-year-old market strategy, from 10 urban areas currently, to 20 this year. That’s all central to the Seattle-based upscale retailer’s new “Closer to You” long-term growth agenda, which was unveiled Thursday at the company’s annual investor day. In a tough, pandemic-riddled economy, investors and vendors are anxious to see how Nordstrom will build for a better future. The agenda calls out the Rack off-price chain, the market strategy, and digital sales as Nordstrom’s biggest growth opportunities for the future.
In addition, the company expects to report fourth-quarter sales down in the lower 20 percent range compared to the year-ago period. In its third-quarter earnings report, Nordstrom reported year-to-date sales down 36.4 percent. The timing and pace of an “ultimate recovery” from the pandemic-induced downturn remains uncertain, according to Nordstrom’s chief financial officer Anne Bramman. Nordstrom for the fourth quarter expects to report positive earnings before interest and taxes, positive operating cash flow and EBIT margin deleveraging by about 500 basis points. Aside from targeting a wider customer base, the Closer to You game plan includes adopting personalization “at scale” and creating a “unified view” of the customer and the inventory across selling channels. In 2021, Nordstrom’s market strategy will be extended from 10 to 20 markets, in total representing 75 percent of the retailer’s volume and covering its top-volume markets. The strategy started as an experiment in Los Angeles three years ago and has become “a powerful enabler for the business and its fundamental operating model,” according to the Nordstroms. It currently operates in San Francisco, Dallas, New York, Chicago, Washington, D.C./Baltimore, Philadelphia, Boston and Toronto, and in 2021 will grow to Portland, Ore.; San Diego; Minneapolis; Denver; Houston and Austin, Texas; Miami and West Palm Beach, Fla., Atlanta, and Detroit. The market strategy entails leveraging the physical assets of Nordstrom’s full-line department stores, Nordstrom Rack and Nordstrom Local to increase services, conveniences and merchandise choices, and speed deliveries. For example, shoppers can return items bought online or at Nordstrom department stores to a Rack or Nordstrom Local location, which may be closer to them. Nordstrom sees the strategy as strengthening customer engagement and the company’s customer-centric culture. In an attempt to gain share from less expensive off-pricers such as T.J. Maxx, Ross Stores and Burlington Stores, the Closer to You agenda calls the more upscale Nordstrom Rack to extend its range with more products at lower prices, and additionally, Nordstrom executives are keen to expand Rack’s footprint to mid-sized markets. Generally, Rack stores are situated not very far from Nordstrom full-line department stores in major markets. Opening Rack units doesn’t require much advance planning, and last October, the division launched order fulfillment capabilities from the stores.
Rack should contribute about $2 billion in incremental sales over the long-term, bringing the division to about $7 billion in sales, according to Nordstrom executives. The division generated $5.2 billion of Nordstrom Inc.’s $15.5 billion in revenues in 2019. Nordstrom Inc. operates 100 Nordstrom full-line stores; 249 Racks; two clearance units; seven Nordstrom Local service hubs; nordstrom.com; nordstromrack.com; nordstrom.ca.; HauteLook.com, and TrunkClub.com. Another critical element of the Closer to You agenda entails growing Nordstrom Inc.’s digital selection fivefold to more than 1.5 million items over the next three to five years, including all the different styles and colors in each style, but not sizes. “We have a unique business model with two powerful brands, highly integrated digital and physical assets, incredible brand partners and employees who are truly unmatched when it comes to their commitment to the customer,” said Erik Nordstrom, chief executive officer of Nordstrom Inc. “Looking ahead, we are building on the strengths of our market strategy to fully unlock the potential of the digital-first platform we have built to better serve customers, gain market share and drive profitable growth.” “In getting through these challenging times, it creates a lot of focus around priorities,” said Pete Nordstrom, president and chief brand officer. “There are so many tactical things happening, sometimes you can lose sight.” Pete Nordstrom Matteo Prandoni/BFA.com In other Nordstrom news, for 2021, the Seattle-based upscale retailer expects revenue, including retail sales and credit card revenues, to grow more than 25 percent. Digital is seen representing about 50 percent of total sales, pretty much consistent with recent 2020 levels, which were at 54 percent.
After 2021, revenue is expected to grow single-digits annually from 2019 levels; operating income is seen growing faster than revenue, and EBIT margin, as a percentage of sales, is expected to exceed 6 percent. Annual operating cash flow is seen topping $1 billion, and annual cap-ex is forecast at 3 to 4 percent of sales. Discussing growth by category, Pete Nordstrom told WWD the company pre-COVID-19 started gradually building its home assortment, primarily across sheets, towels, decor and cookware. An aggressive strategy for Nordstrom’s relatively small home business is being drawn up. With the home business, “We haven’t had a lot of authority in the area,” Pete said. “We have all these other productive businesses, but we can layer on a lot more home selection without, for example, cutting our shoe offer. We are seeing it happen right now. If you go to some of our stores, you notice it already.” Athleisure, a strong category, accelerated its growth during the pandemic, and an activewear hub was recently launched on the website, Nordstrom noted.
For the last three years, the retailer has been investing in the kids business, adding equipment such as high chairs and strollers, which the company never sold before. But the fastest-growing category for Nordstrom is designer merchandise, which is expected to do even better in the second half. Affluent shoppers have not let up on the luxury purchasing during the pandemic, because they are not spending much, if at all, on traveling and dining out, and because luxury is very much a “feel-good” kind of purchase. “Even through the pandemic, our designer business has grown quite a bit,” Pete said. “We are not selling as many gowns or special occasion, but we are selling more streetwear, which is still designer. It’s coveted, scarce and expensive. “It is clear vaccinations will happen and will enable people to get out there,” he added. “Having more events and occasions to get dressed for — that’s coming — and we believe people are thinking about getting out, and care about what they look like. But you can’t pinpoint the exact day or tipping point when you really start to see it,” Nordstrom said, acknowledging that the pandemic and the precarious state of the economy make planning inventories exceptionally challenging compared to normal years. Asked if 2021 has seen any pickup in store traffic, Nordstrom replied, “Not much.” It’s been most adversely affected in the evening hours, Nordstrom said, due to restaurants operating at limited capacity, events being canceled, and people sheltering in to reduce the risk of being infected by COVID-19. “Going to work, going out to dinner, or just being out there among friends creates a catalyst for us,” said Nordstrom. The company’s urban flagships in places like Manhattan, Portland, Ore., and Los Angeles have been most impacted due to people fleeing cities for less dense areas. “The Southeast is generally busier than the rest of the country,” the executive said, due to the warmer climate where there are many more open-air shopping centers. Shoppers feel safer from COVID-19 in open-air settings as opposed to enclosed centers. He characterized Rack as “super productive,” though he added that in some cases, rents and services are high, requiring Nordstrom to take a closer look at the expenses and figure out how to operate more profitability, sometimes at lower volume levels. In the off-price sector, Rack has a premium positioning. In the question-and-answer segment of the investor update, when Erik Nordstrom was asked whether the addition of lower prices could jeopardize the positioning, he responded, “We know we have customers in our Rack stores that not only shop us but go to other retailers to get these lower price points. We don’t see any evidence of really anything negative as we expand to our lower price points. We think there is a lot of space in that price of product to retain our strong reputation. We have a strong brand. “We see an opportunity to really focus on Millennials and grow our customer base there,” the CEO said. Geevy Thomas, president of Nordstrom Rack, said 80 percent of the company’s top 200 brands are shared by Nordstrom and Rack. Eighty percent of the Rack stores are in off-mall locations and 70 percent are in Nordstrom’s top 20 markets. Thomas said Rack stores have been recast into three categories: price doors, which will distort to lower average prices; brand doors that stay largely unchanged, and hybrid doors, mixing price and brand store characteristics. For the Rack off-price chain overall, “The average selling price will decline, but transactions will increase transactions, Rack will attain new customers, and we will be expanding price stores in new markets.” He cited beauty, home, kids and active as high growth categories at the Rack. “We expect to double sales in those categories over time.” Well before COVID-19 hit, the Nordstroms foresaw digital sales representing 50 percent of the retailer’s volume with its “digital-first” approach. The pandemic just made it happen a lot sooner. The company is leveraging its technology platform to create “a unified view of the customer as well as the company’s product and inventory,” said Pete Nordstrom. “Online, the selection can go as broad as the customer indicates, we can start with a digital mentality, then we edit it down to a store, but you have the same point of view. Ultimately, it’s more choice for customers.” The Nordstroms also cited a goal to increase links between digital and physical channels, and explained that delivering personalization “at scale” encompasses not just product recommendations, but also providing entire looks to further outfitting, salesperson videos, conveniences and VIP access to enhanced services. To achieve its goal of broadening the digital assortment from 300,000 items to potentially 1.5 million over the next three to five years, Nordstrom will deepen commitments to private label, drop shipping and revenue sharing, Pete Nordstrom said during the investor update. Over time, he sees 50 percent of Nordstrom’s merchandise procured through traditional wholesaling, versus 85 percent currently. He noted that in Nordstrom’s last Anniversary Sale, over one quarter of the sales via Nordstrom.com were fulfilled by drop ship. “We are moving from a transactional way of doing business and more into a collaborative way, which in a lot of ways share the risk,” he said. “When you build that trust and become more transparent [with vendors], you find ways to share that risk that enables business to happen with more speed and agility, and more relevance for customers.”