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Nordstrom Sets a ‘Closer to You’ Long-term Growth Agenda

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David Moin
·8 min read
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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.

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That’s all central to the Seattle-based upscale retailer’s new “Closer to You” long-term growth agenda, which is being unveiled today 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, Nordstrom executives told WWD that the company expects to report fourth-quarter sales down in the lower 20 percent range compared to the year ago period. In its 3Q earnings report, Nordstrom reported year-to-date sales down 36.4 percent.

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.

Next year, Nordstrom’s market strategy will be extended from 10 to 20 markets, in total representing 75 percent of the retailer’s volume and encompassing 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; Austin and Houston, 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 offpricers such as T.J. Maxx, Ross Stores and Burlington Stores, the Closer to You agenda for the more upscale Nordstrom Rack entails extending the off-pricers’ 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’s 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 the nordstrom.com 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.”

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 expected at 3 to 4 percent of sales.

Nordstrom reiterated forecasts for the fourth quarter, indicating citing a decrease in sales in the low 20-percent range from the year-ago period; positive earnings before interest and taxes (EBIT) and positive operating cash flow, and EBIT margin deleveraging by about 500 basis points.

Discussing growth by category, Pete Nordstrom said 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.

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,” said Pete Nordstrom. “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.

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 we start with a digital mentality, then we edit it down to a store, but you have same point of view. Ultimately, it’s more choice for customers.”

Nordstrom also cited a goal to deliver personalization “at scale,” and increase links between digital and physical channels.

With the home business, “we haven’t had a lot of authority in the area,” he 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.”