While Nordstrom's (NYSE:JWN) off-price Nordstrom Rack business has had its fair share of ups and downs in recent years, it has been the company's primary growth driver over the past decade. Last year, Nordstrom reported domestic off-price sales of $5.2 billion, up from just $1.4 billion in fiscal 2009.

Now, Nordstrom is turning to its Rack stores to help it recover from the steep sales declines and losses it reported for the first two quarters of fiscal 2020. Here's how Nordstrom Rack can help the entire company return to success.

Nordstrom Rack as fulfillment hub

Nordstrom is leaning on the Rack chain in a way that involves the new fulfillment options it's rolling out broadly. A year ago, in conjunction with the opening of its Manhattan flagship store, the company began offering order pickup, returns, alterations, and even personal styling for full-price merchandise at its two Nordstrom Rack stores in Manhattan. Previously, Nordstrom had kept its full-price and off-price businesses quite separate.

As of this month, customers in many other markets will be able to have items from Nordstrom.com shipped to Rack stores for pickup. Customers will also be able to pick up merchandise ordered from Nordstrom's off-price e-commerce sites at Rack stores. In Nordstrom's top 10 markets -- which account for about 60% of its sales -- the company is able to quickly move inventory between stores and distribution centers, making many items available for next-day pickup.

The entrance to a Nordstrom Rack store, with Nordstrom's flagship store in the background

Image source: Nordstrom.

Most Nordstrom Rack stores occupy off-mall locations. The company is positioning them as convenient pickup points, especially for customers who don't have another secure place to receive packages or who want to get their items faster without paying for express shipping.

For the iconic retailer, there's a huge benefit to getting customers to pick up orders. First, shipping many items to a single business address is much cheaper than shipping items individually to customers' homes. Second, customers who come into a Rack store to pick up an online order (or make a return, for that matter) may stick around to browse and potentially make an additional purchase.

Pursuing off-price e-commerce growth

Nordstrom is also looking to build on the early success of its off-price e-commerce businesses as it recovers from the pandemic. The combination of Nordstromrack.com and the HauteLook flash sale site reached $1 billion in sales faster than any other business line in the company's history.

To continue that growth, Nordstrom said last week that it will begin shipping some online off-price orders from its Rack stores. This will significantly increase the selection available online, which should lift sales.

Nordstrom will also start allowing customers to pick up off-price online orders from full-line stores (in addition to Rack stores, as noted above). Shipping from nearby Rack stores and encouraging customers to pick up orders at physical stores will help Nordstrom improve the economics of its online off-price business, which has been in investment mode (i.e., losing money) until now.

A long-term profit growth driver

Enabling Rack stores to serve as hubs for full-price order pickup, returns, and other services could presage further trimming of Nordstrom's full-line store network. Nordstrom closed seven full-line stores last year and chose not to reopen another 16 full-line stores following the pandemic. This has left it with 100 full-line stores in the U.S. and Canada -- a number that could shrink further. 

After all, full-line sales were migrating rapidly toward e-commerce even before the pandemic hit. Nordstrom's best full-line stores are still highly productive. However, in recent years, other full-line stores have been useful mainly for facilitating online order pickup, returns, alterations, and personal styling: all services now available at Nordstrom Rack stores.

There are 248 Nordstrom Rack stores in the U.S. and Canada, far outnumbering the company's full-line stores. For example, in the Phoenix metro area, where Nordstrom recently closed one of two full-line stores, there are six Rack stores. Thus, Nordstrom can offer more convenient pickup options even as it shrinks the full-line store base.

Over time, shifting to a more focused full-line store network should boost profitability and return on invested capital without impacting total sales very much. While Nordstrom's business is hurting in 2020, the company is positioning itself for a strong profit recovery in the years ahead.

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