Nordstrom pushes ahead with Rack expansion despite declines

Credit card delinquencies are up and prospects for the holiday quarter are hazy, executives said on Thursday.

Nordstrom on Thursday reported that Q2 net sales fell 8.2% year over year to $3.7 billion, due in part to the shutdown of its unprofitable Canadian business (which cost 400 basis points) and the timing of its anniversary sale (about 300 basis points). E-commerce fell 12.9% and was 36% of total sales.

The department store announced further expansion of and confidence in its off-price Rack business despite falling sales, including a 4.1% decline in Q2. At the full-line namesake store, net sales fell 10.1%. Traffic to both banners was softer in the period, CEO Erik Nordstrom told analysts.

The company’s effort to pare inventory led to a 17.5% reduction compared to last year. Gross margin contracted by 20 basis points to 35%. Net income rose 8.7% to $137 million.

Nordstrom continues to lean heavily on its Rack business and improving its performance remains one of three top priorities, along with inventory productivity and supply chain optimization initiatives, Erik Nordstrom said Thursday. Rack’s sales trends improved throughout the second quarter, and July was its best month, he said.

The company has opened eight new Rack stores so far this year and plans 11 more by the end of the year, he said.

Declines there have been narrowing since last year, despite headwinds like the company’s decision to stop fulfilling e-commerce from those stores, which the company said cost some 500 basis points in net sales.

“There are certainly signs here that initiatives around Rack and overall operational efficiencies are taking hold,” William Blair analyst Dylan Carden said in emailed comments.

But the sales at Rack are still falling despite consumers’ interest in good deals in general and off-price in particular, according to GlobalData Managing Director Neil Saunders.

“Despite conditions being extremely conducive to off-price, Rack is not making hay while the sun shines,” he said in emailed comments. “Rather it is still suffering from an overly bland assortment, a lack of compelling brands, and somewhat uncompetitive prices. In our store checks we’ve seen modest improvements to the range, but there is a very long way to go before Rack is back on the front foot.”

Executives also noted hesitation around spending and uncertainty regarding the all-important fourth quarter. While sales improved during the second quarter, both banners have seen sales trends deteriorate in the third quarter, CFO Cathy Smith said, adding that the company’s focus is on improving profitability and tamping down costs.

“We continue to see a cautious consumer, and it remains to be seen how changes in inflation and higher interest rates will affect discretionary consumer spending in the second half of the year, particularly during the holiday season,” she said.

Revenue from Nordstrom’s store credit card rose 5.8% to $110 million, but executives, like those at Macy’s earlier this week, noted that delinquencies are on the rise.

“Those can be a precursor for higher credit losses in the future,” Smith said.