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For Nordstrom, Rack Is Proving a Tough Nut to Crack

The Nordstrom Inc. customer is still spending, but demand decelerated in the quarter.

In a Nutshell: Customer demand fell in the second quarter starting in June, mostly at Nordstrom Rack, Nordstrom CEO Erik Nordstrom told investors.

Customers, he said “want what they want,” and that means newness more so than low prices. For now, the company is seeing “no signs of trade down.”

Customers in the second quarter mostly stayed away from clearance sales and private-label items. The lowest income shoppers—the ones more likely visiting Rack—seem to be more affected by inflation than those with deeper pockets.

“We are updating our outlook for the balance of the year to reflect the softening trends and actions we are taking to reduce our inventory level. Second quarter customers continue to shop for occasions while also refreshing their wardrobes, which drove demand for our core categories and services,” Nordstrom said.

Rack has been an issue for Nordstrom for some time now. At one point, the off-price business was outperforming the full-price stores, but the local hub strategy changed that trajectory. Nordstrom raised some eyebrows last year when it said Rack didn’t have enough inventory in business-driving categories such as women’s apparel and shoes. Reports surfaced a month later that the retailer was considering strategic options for Rack.

Nordstrom said the company is beefing up the supply of premium brands flowing into Rack and improving the assortment, which drove a sequential increase in sales from the prior quarter. However, 90 percent of the top brands at Nordstrom’s department stores are also sold at Rack. Meanwhile, management is “taking aggressive action” to sell through overstock inventory through year end.

Premium brands are a differentiator for [Rack] and we are focusing on having the best brands at the best prices at each of our locations,” Nordstrom said. “In addition to improving penetration of premium brands, we are shifting away from the lower price point items that have not resonated with Rack customers.”

Pete Nordstrom, president and chief brand officer, said customers responded “positively overall to new fall product during the [Anniversary Sale] event.” Private label product, along with underperforming items, will be cleared out in the third quarter—even if it means taking deeper markdowns—to meet current demand trends, he said.

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“We are disappointed in the performance of our private-label product. We have brought in new leadership [to reset] our strategy to deliver more compelling product to our customers,” he said, adding that while designer category sales are still “posting double digit growth, trends have decelerated. We are anticipating increased market pressure based on current sales trends.”

The retailer is aiming to boost productivity in its distribution and fulfillment centers, speed up delivery times and make more product available for same-day or next-day pick-up.

Net Sales: For the second quarter ended July 30, total revenues rose 12 percent to $4.1 billion from $3.66 billion, which included a 12 percent gain in net sales to $3.99 billion from $3.57 billion. The balance of revenues was from credit card income.

By business, full price Nordstrom sales rose 14.7 percent to $2.77 billion from $2.42 billion, while Nordstrom Rack sales rose 6.3 percent to $1.22 billion from $1.15 billion. And digital sales, which rose 6.3 percent from year-ago levels, represented 38 percent of total net sales for the quarter.

In the quarter, men’s apparel had the strongest growth versus 2021 levels, while shoes, women’s apparel and beauty also saw double-digit growth as customers updated their closets and returned to occasions. The retailer’s Anniversary Sale event saw volume growth of 5 percent.

Inventory at the end of the quarter was up 9.9 percent from year-ago levels.

For the six months, total revenue was up 15 percent to $7.67 billion from $6.67 billion, which included a 15 percent increase in net sales to $7.46 billion from $6.49 billion.

Earnings: Net income rose 58 percent to $126 million, or 77 cents a diluted share, from $80 million, or 49 cents, a year ago.

Wall Street was expecting adjusted diluted earnings per share of 79 cents on revenue of $3.96 billion.

For the Fiscal Year 2022, Nordstrom revised guidance, lowering expectations for adjusted EPS in the range of $2.30 to $2.60, down from prior outlook of $3.20 to $3.50. Revenue growth was

For the six months, net income was $146 million, or 90 cents a diluted share, against a net loss of $86 million, or 54 cents, in the year-ago period.

CEO’s Take: “We are prioritizing actions in the short term to position our business for success in a rapidly evolving environment. It means adjusting our plans for the second half, aligning expenses to those plans, reducing inventory levels and exiting the year in a clean and current inventory position,” Erik Nordstrom said.