Nordstrom Considers Spinoff Of Rack Outlet Business

It’s no secret that the retail industry has suffered substantial disruption over the past two years. From pandemic closures to congested supply chains to workforce shortages, the industry has struggled to maintain business as usual in the face of numerous ‘once in a lifetime’ challenges. Companies have been forced to close stores and reinvent how they interact with consumers in order to successfully navigate the ‘new normal’ - which is anything but. As brands look to realign their business models to meet the changing environment, Bloomberg reports that one retailer is partnering with a leading consulting group to evaluate its options to spin off its outlet business.

Nordstrom has long been a mainstay of retail shopping, and while sales have risen 3% on a two-year basis, its low-price business Nordstrom Rack has struggled to regain its pre-pandemic performance level, with sales falling 8% from 2019 in a three-month period ended October 30th. In 2021, Rack’s top 50 brands made up 42% of sales, relative to about 50% in 2019. The company must frequently purchase additional inventory and hold reserves to meet times of high demand or tight supplies. The company’s current market cap sits at about $3.2 billion.

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In a third-quarter earnings call, Chief Executive Officer Erik Nordstrom commented that Rack lacked sufficient premium brands and offered more lower-priced products than its customers wanted. The company has engaged consulting group AlixPartners to evaluate ways to increase Rack’s sales performance and profitability, with an eye on an eventual spinoff.

The move comes at a time when investors are turning up the pressure on retailers to spin off their rapidly-growing online businesses from the traditional brick-and-mortar stores, with e-commerce retailers tending to fetch higher valuations. Saks Fifth Avenue spun off its online operations from its physical stores earlier in 2021, with executives offering positive feedback and reportedly preparing for an IPO in 2022. Macy’s and Kohl’s have both felt the same pressures from activist investors and are considering similar spinoffs.

While we have often heard about ‘getting back to normal’ after the pandemic, it is becoming increasingly apparent that there may never be a return to the way things used to be. Retailers, like any other businesses, will need to display increased flexibility to meet current and new challenges, and this will provide ample opportunity for innovation and improvement.