What A Rack Spin-Off Would Say About Nordstrom And Off-Price Too

Nordstrom JWN may be considering a special Christmas present for investors…and itself too.

Reports circulated this week that the department store chain was considering spinning off its Rack off-price division, following a series of disappointing performance results. The company isn’t confirming the story, yet it would seem to be consistent with its ongoing attempts to extract more value for its assets, something it has attempted at least twice over the past few years when it looked at going private. It also would be in line with other spin-offs being talked about in the retail sector.

Rack, which has about 250 stores and with about $3.3 billion in sales represented almost a third of Nordstrom’s overall revenue in fiscal 2020, has seen lackluster results recently, with consistent sales declines, 8% in the most recent quarter. These come even as the overall off-price sector, led by the TJX brands, Ross and Burlington, is generally putting up better than average performances.

It was only two years ago – pre-pandemic it should be noted – that Rack was outperforming the parent full-line stores and was considered the jewel of the company. Exactly what has gone wrong since is open to interpretation. The company says it has trouble getting enough of the right inventory for the Rack stores but outsiders say the merchandising assortment is haphazard and some have complained about the proximity of Rack stores to its mainstream department store locations.

A Rack spin-off could help the company’s stock which has sunk to the low $20-a-share range, down from its 52-week high of more than $46 a share. It would also be consistent with other efforts by retailers – and retail investors – to extract higher share prices. Hudson Bay Co., now private, split off its Saks Fifth Avenue online unit from its physical store brand amid rumors that it will take that e-commerce brand public. Outside investor groups are now urging both Macy’s M and Kohl’s to do the same, though both seem to be resisting doing so.

Wherever Rack ends up, its recent poor results would seem to be troubling for owners, old or new. While the pure-off-price players are putting up strong performances, Rack is not. Nor is the Saks nameplate in the space, Off Fifth, which has been cut back by its HBC owners and could be shut down entirely. The other big full-line retailer with an off-price presence is Macy’s, which continues to expand both its Backstage and Bloomingdale’s Outlet unit.

Hanging over the entire off-price space is the severely underdeveloped online side of the business. Ross and Burlington have no e-commerce and TJX is only now just starting to get its online business up and running. Curiously Nordstrom has had one of the better developed online sides.

If the future of off-price lies in pure-play companies and not in department store sub-brands, Rack’s ultimate fate could become moot. But in the meantime, the Nordstrom family seems to be continuing to look for new solutions.