Should Rack Be Nordstrom’s Growth Engine?

Nordstrom plans to accelerate store openings at its Rack off-price concept following a strong recovery in sales in the holiday quarter.

Plans call for 23 Rack openings in 2024 after adding 19 in 2023. There were 256 Racks in operation at the close of the year, making up a third of Nordstrom’s overall sales.

Opening new Rack stores “continue to be an excellent investment as they deliver well in excess of their cost of capital with a relatively short payback period,” CEO Erik Nordstrom said on a call with analysts.

Rack’s locations also enable the retailer to reach customers across price points.

“Rack stores continue to be a growth engine for our company as they are our largest source of new customer acquisition, accounting for over 40%,” Nordstrom said. “Growing our store count also supports long-term customer retention. In fact, roughly a quarter of retained Rack customers migrate to the Nordstrom banner within four years.”

Expanding locations improves Rack’s performance and supports overall omnichannel offerings. Said the CEO, “We consistently hear how customers enjoy the convenience of shopping between our banners, taking advantage of the services we offer, including cross-banner in-store returns, buy online, pick up in-store, and alterations.”

Finally, the ramped-up Rack openings will seek to build on the “momentum” being seen at Rack. Sales at Rack improved 14.6% in the fourth quarter, rebounding from a decline of 8.1% in the year-ago period. Comps were up high single digits.

The retailer had blamed Rack’s decline in the 2022 holiday quarter on weakness from lower-income customers amid inflationary pressures, although the leading off-pricers, TJX Companies and Ross Stores, managed positive gains over the period. Rack’s turnaround includes a renewed emphasis on “premium” offerings after a past approach of bringing in lower-priced items to reach a wider audience didn’t resonate with core customers

Nordstrom said, “We focused our efforts to improve our offering at the Rack as we know that delivering great brands at great prices is what our customers want.”

Nonetheless, muted guidance was provided by company officials for 2024. Revenues are expected in the range of a decrease of 1% to an increase of 2% in 2024 versus 52 weeks in 2023.

Growth at Rack is expected to be offset by “flattish” sales at the Nordstrom banner.

The Nordstrom chain is still aiming for “digital-led growth supported by our stores.” In April, Nordstrom will add a third-party marketplace to the Nordstrom.com website, providing increased offerings to online shoppers without having to absorb the expense of holding additional inventory. Eric Nordstrom also said the Nordstrom chain’s growth is expected to be helped by “amplifying the brands that matter most to our customers, along with ensuring we have the depth in these brands consistently across our stores and online.”