Canada Will Have to Wait for Nordstrom Rack

Canada represents a huge opportunity for luxury retailer Nordstrom (NYSE: JWN  ) . The company will make its first foray into that market later this year and plans to open six full-line department stores there by early 2017. These stores will be located in six of the top 11 malls in North America in terms of sales productivity.

Nordstrom's Canadian stores will be in some of the best malls in all of North America.

Nordstrom also plans to bring its off-price Nordstrom Rack stores to Canada. However, it has now pushed back the Canadian debut of Nordstrom Rack from 2015 until 2017. Entering the Canadian market more slowly is probably a wise move because of the operational complexity of launching in a new country and Canada's sluggish economic growth -- a harsh lesson that Target (NYSE: TGT  ) has recently learned.

Slowing down the Canadian expansion
Eventually, Nordstrom plans to open up to 10 full-line department stores in Canada along with about 20 Nordstrom Rack off-price stores. So far, it has selected sites for the first six full-line stores. Nordstrom will open its first Canadian store in Calgary this fall. This will be followed by new stores in Ottawa and Vancouver next year, and three Toronto-area stores that will open in 2016 and 2017.

Nordstrom originally planned to roll out its Nordstrom Rack off-price brand on a similar timetable. However, management realized that its existing growth plans were creating enough complexity that it would be (small-f) foolish to force the expansion pace. (Nordstrom is also in the midst of a four-year plan to double its Nordstrom Rack store base in the U.S.)

Canadian shoppers will have to wait a few more years for Nordstrom Rack.

Instead, Nordstrom now plans to start opening Rack stores in Canada in 2017. This will give it time to evaluate the strengths and weaknesses of its full-line stores there -- and if necessary, tweak its strategy -- before adding the Rack concept to the mix. Importantly, it is much quicker and easier to open Nordstrom Rack stores compared to full-line Nordstrom stores. If conditions change, Nordstrom could accelerate the opening of its first Canadian Rack stores.

Lessons from Target
It's clear from the recent change in Nordstrom's growth plans that management is learning lessons from Target's disastrous Canadian expansion. Target attempted to rapidly penetrate the Canadian market by acquiring leasehold interests for more than 100 stores from Zellers (a Canadian retailer). It then opened 124 stores in Canada last year.

Target initially projected that it would reach profitability in Canada within less than a year. Instead, the company racked up a pre-tax loss of nearly $1 billion in Canada during 2013. The company expects sales in Canada to double this year, but that will still leave Target Canada well short of breakeven.

Target lost nearly $1 billion in Canada last year, and the red ink will keep flowing in 2014.

Target's biggest problem has been that its business model relies on changing shoppers' habits so that they make frequent trips to Target for essentials like groceries and health care items. That drives store traffic and helps Target sell higher-margin discretionary items like clothing, toys, and housewares.

Target hasn't had as much success as expected in convincing Canadians to make Target runs a part of their weekly routines. This undermined the rest of its business plan. Opening 124 stores in a short period of time magnified Target's problems in Canada while increasing the difficulty of potential fixes.

Nordstrom should be in better shape than Target. It plans to open one new Canadian store every six months (approximately) beginning this September. Delaying the initial Nordstrom Rack store openings in Canada will help ensure that the company is able to get its Canadian operation on a steady footing before adding a second store concept and additional complexity.

Nordstrom still expects to lose money in Canada for a while -- including a $35 million loss before interest and taxes in 2014 -- but these costs will be manageable because of the phased nature of the rollout. Moreover, Nordstrom can use the first few stores to test different strategies and refine its plans if necessary for the later store openings.

Foolish bottom line
While Canada is one of the most important growth opportunities for Nordstrom, rushing into the market would still be risky. By delaying the first Nordstrom Rack openings in Canada until 2017, Nordstrom will be able to make sure its full-line stores there are on the path to strong profitability before taking on a new challenge. This is a very prudent move -- and should ensure Nordstrom has a much smoother entry into Canada than Target experienced.

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