Nordstrom taps Rack as growth driver, tackles external theft in its transportation network

By James Rogers

Nordstrom has taken "swift" action to tackle external theft, according to CFO Cathy Smith

Nordstrom Inc.'s Rack business featured prominently in the company's first-quarter results Thursday as the department-store chain targets the off-price stores as a growth driver.

Nordstrom Rack is the discount division of Nordstrom, Inc., offering customers a selection of apparel, accessories and shoes at savings of up to 70 percent off regular prices.

The company reported a wider-than-expected first-quarter loss, although revenue topped analysts' estimates. "Net sales growth was almost entirely led by the Nordstrom Rack banner," wrote J.P. Morgan analyst Matthew Boss, in a note released Friday. "Specifically, CEO Nordstrom cited year-over-year growth in customers & purchase trips, with improved regular price sales & sell-through relative to last year."

J.P. Morgan maintained its underweight rating and $17 price target for Nordstrom (JWN).

Related: Nordstrom shares fall after wider-than-expected first-quarter loss

Nordstrom Rack sales increased 13.8% and comparable store sales grew 7.9% year-over-year, compared with total company sales growth of 5.1% and comparable sales growth of 1.8%.

"Rack's 8% quarterly comp was impressive, especially when compared to peers," wrote BMO Capital Markets analyst Simeon Siegel, in a note released Friday. BMO maintained its $20 price target for Nordstrom. Of 20 analysts surveyed by FactSet, four have an overweight or buy rating, 12 have a hold rating, and four have an underweight or sell rating for Nordstrom.

Building momentum at Rack is a priority for Nordstrom this year, according to Nordstrom CEO Erik Nordstrom. Speaking during the conference call to discuss the results Nordstrom explained that the company has opened 9 new rack stores since the start of the fiscal year and is on track to open a total of 22 this year.

Related: Nordstrom confirms it's looking to go private, with founding family interested in deal

The issue of theft, an issue which was dogged the retail sector in recent years, was also addressed during the Nordstrom conference call. CFO Cathy Smith cited external theft in Nordstrom's transportation network and inventory cleanup in the company's supply chain as operational factors that impacted first-quarter gross margins. "We have taken swift actions on these factors to mitigate risks going forward," she added. "We did a quick deep dive on root cause corrective action, and we're committed to offsetting that given that Q1 is our smallest quarter and we've got a lot of the year in front of us."

Nordstrom, however, did not provide any update on its announcement last month that the company is looking to go private.

Nordstrom shares rose 3.8% Friday, outpacing with the S&P 500 index's SPX decline of 0.5%. The company's stock is up 18.3% in 2024, compared with the S&P 500 index's gain of 9.2%.

-James Rogers

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05-31-24 1156ET

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