Dec 22 2021
Nordstrom has reportedly retained the services of AlixPartners to explore a spinoff from its recently struggling Nordstrom Rack non-price business.
The movement, reported for the first time by Bloomberg, follows Saks Fifth Avenue’s hiring of AlixPartners earlier this year to explore a separation of its online business. Saks.com is slated to go public in 2022.
Both Macy’s and Kohl’s are facing pressure from shareholders for similar online operations. Activist shareholders are betting that the online spinoff will reach higher valuations.
A Rack spin-off can also take advantage of the higher quality stock multiples in recent years offered at faster growing off-price versus traditional department stores.
Nordstrom Rack, positioned as a more upscale, overpriced product, has been Nordstrom’s main growth driver in recent years, alongside its online business.
The spin-off, however, would come at a time when Rack is struggling to regain momentum during the pandemic. In the third quarter, Rack’s sales fell 8% from the same period in 2019, while its namesake department store grew 3%. On the same two-year basis, same-store sales increased 14 percent in both TJX Cos. and Ross Stores and 16 percent to Burlington Stores.
CEO Erik Nordstrom said during a analyst call that Nordstrom was “not at all satisfied” with Rack’s performance. Stocks of Racks were “considerably below” plan and, in particular, short of premium brands that Mr. Nordstrom described as “the juice that keeps customers coming to Rack.”
Buying 90 percent of the top brands sold at Nordstrom for Rack also creates a challenge for the chain. He said, âBuying the same top brands at low prices that we offer at Nordstrom is especially difficult in an environment with production constraints and lower clearance levels. “
Rack is increasing the available pack-and-hold stock by two to three and is looking for new brands to overcome shortages.
Simeon Seigel, BMO Capital Markets, said Business intern he believes brands prefer to sell at a lower price such as TJX with minimal e-commerce presence because their product cannot be easily found online.
He further believes that the overall dynamics of Nordstrom’s margins are affected by Rack’s ownership. Mr. Seigel said Initiated, âIt’s hard to operate at a discount unless the business is strictly focused on buying at a discount. TJ Maxx doesn’t sell cheap clothes, they sell cheap expensive clothes.
DISCUSSION QUESTIONS: Do Nordstrom and Nordstrom Rack make more sense together or separately? What do you think is behind the recent poor performance and inventory sourcing challenges at Nordstrom Rack?
âSplitting the business will not automatically correct problems, but it may allow for better and more focused management of the division. “