How Nordstrom Plans to Improve Its Rack Business by Focusing on the Supply Chain

Nordstrom is laying out a plan to improve its Rack business after reporting earnings on Tuesday that fell short of analysts’ expectations and caused its stock to slide more than 28% this morning.

The Seattle-based department store chain reported third quarter net earnings of $64 million with net sales of $3.64 billion.

Sales increased 18% compared with 2020 results due to the timing of this year’s Anniversary Sale, with approximately one week falling into the third quarter of 2021. But compared to the same period in 2019, Nordstrom banner net sales increased 3% and Nordstrom Rack sales decreased 8% in the same period due to a shortage of off-price product amid the supply chain conundrum.

This disappointing performance contrasts with its competitor Macy’s, which raised its full-year guidance. Kohl’s, another of Nordstrom’s rivals, also raised its full year 2021 outlook last week and expects net sales to increase in the mid-twenties percentage range.

On its third-quarter earnings call on Tuesday, the retailer — which is seeing the supply chain woes impact women’s apparel and shoes in particular — acknowledged that it needs to “deliver more, grow market share, and deliver greater profitability with a sense of urgency.”

Erik Nordstrom, CEO of Nordstrom, Inc., said on the call that “Rack faces a unique challenge as 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.” He also noted that Rack’s top 50 brands represented approximately 50% of sales in 2019. Year-to-date, these brands represented only 42% of sales, highlighting the outsized gap in the merchandise availability, according to Nordstrom.

In response, Nordstrom said the company will be “executing a multilayered plan to both grow our offer of the most coveted brands we carry as well as source from new vendors to ensure we have the selection our customers want.”

First up, to minimize supply gaps, Nordstrom will increase its use of “pack and hold” inventory by a factor of 2 to 3 times, allowing it to buy larger quantities of relevant items when available. Then, it can hold a portion of it to deploy in periods with high demand, tight supply or system constraints. According to Nordstrom, preliminary results based this strategy show sales responding positively with improving inventory positions.

Second, the retailer said its mix skewed too far to lower prices at the Rack with average unit retail declining 4% versus 2019. In response, the retailer is rebalancing its assortment to increase the breadth of selection in premium brands, improve average selling price and better align with customer expectations.

Plus, the retailer is aiming to strengthen Rack’s brand awareness and drive traffic. As part of this effort, Nordstrom launched a new “More Reasons to Rack” marketing campaign in September.

With this slate of actions, Nordstrom anticipates improvement in the fourth quarter, with more significant progress to follow in the first half of fiscal 2022. And, overall Nordstrom will maintain its full year outlook and expects revenue growth to be more than 35%.

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