Dive Brief:

• Citing pressures on full-line sales, store traffic and margins and a need to improve its off-price Rack division, Cowen & Co. analysts on Monday lowered their Nordstrom rating to "market perform" from "outperform," according to a note emailed to Retail Dive.

• Analysts led by Oliver Chen expressed surprise that, given the healthy economy, comparable sales at Rack are trailing off-price stalwarts like TJX Cos. and Ross, and they noted that comps have also "underpeformed" at Nordstrom's `full-line stores.

• Margins are also hurting as Nordstrom invests in online channels, supply chain, IT, marketing and occupancy reductions, and as the retailer expands Rack in Canada and adds full-line men's and flagship stores in Manhattan, according to Chen and his team. Operating margins have compressed from about 11% in in 2012 to about 6% last year, the analysts noted, adding that the department store may need to shrink its store base. 

Dive Insight:

The Cowen team's assessment and downgrade is what the Nordstrom family was likely hoping to escape when they made their attempt last year to take the company private, an effort that ultimately came up short.

Despite the short-term pressures, Nordstrom has "numerous best-in-class features, including 29% full-line digital penetration and blending the physical and digital channels, and does an excellent job driving customer centricity," Chen and his Cowen colleagues wrote on Monday. 

In the report, praise for the company's innovation and e-commerce chops is dragged down by profit concerns driven by the investments those things require. "[Wall] Street expects positive results quarter by quarter, which even in the best of times is often unrealistic," Mark Cohen, director of retail studies at Columbia Business School, told Retail Dive last year when news of a possible go-private deal first broke. "Let alone times when the industry at large is in turmoil, or a specific retail company is in some form of turnaround or transition." 

The department store retailer does have a strong record of innovation, including a tech-quisition strategy that has helped the Nordstrom reach new customers, refine its merchandising and explore cutting-edge retail concepts, according to Maya Mikhailov, co-founder and chief marketing officer of GPShopper. Nordstrom also has opened in-store pop-ups to feature cutting edge brands and is experimenting with a merchandise-free "Local" shop.

Its Rack division was launched in the 1970s, long before Macy's began getting into off-price in earnest. But Cowen analysts on Monday said Rack "remains a work in progress as digital strength has masked weak physical store comps." The weak store traffic and sales should lead executives to consider shrinking the footprints of both divisions, analysts said.

In addition to weakened store comps, Cowen analysts also said that they're concerned about Rack's ability to manage inventories and the company's "need to further leverage full-line digital learnings into the off-price world." ​

But, while Nordstrom in many ways is ahead of the game, many observers now believe the company has wedged itself between a rock and a hard place. As Rack grows, the flagship is bound to suffer, and the loss of sales and customers to its off-price sibling is probably permanent, many observers say.