During its investors day conference on Thursday, Nordstrom executives shared plans for profitable growth that are partly an expansion of its existing strategy and partly a remarkable departure from how it has historically done business. Most notable is the integration of its off-price Rack with its full-line business, along with an embrace of e-commerce that leaves physical locations — usually the centerpiece for any department store — in a supporting role.

"At the heart of our business transformation is the recognition that the unique combination of the Nordstrom and Nordstrom Rack brands, along with our combined physical and digital expertise, create a powerful opportunity to get closer to the customer than ever before," CEO Erik Nordstrom said via video conference.

In financial terms, the goals are to accelerate revenue growth, "with opportunity to reach $17 billion in sales over the medium term;" expand profit margin, with the "potential to sustain 6% or higher EBIT margin going forward; improve return on investment through shifts in inventory and assortment management; and "consistently generate more than $1 billion in operating cash flow annually."

Connecting Rack

Nordstrom has spent the last year bringing its off-price Rack business more fully into its market strategy, announced in 2018, which knits together online and offline operations in a given area. On Thursday, executives said that the Rack and Nordstrom websites will also merge into one.

The market approach is perhaps seen most vividly in New York City, where a new flagship, two Local stores, several Rack stores and the website work in concert. In the last year, it has been rolled out to the company's top 10 markets, which provide about half its total sales. That will expand to 20 markets, representing 75% of sales through 76 Nordstrom stores, seven Nordstrom Locals and counting, and 167 Rack Stores.

All locations offer pickup and returns, regardless of where or how a purchase was made. The integration has sped up order fulfillment, with on average four times more product available to the customer the next day and a one-day reduction in shipping speed, Erik Nordstrom said Thursday. In these areas, customer accounts are up by 20%, and sales have grown "at a rate of nearly 200 basis points higher than other markets," he also said.

In addition to getting place of pride on the Nordstrom website and within the market strategy, the Rack brand will no longer have to compete with HauteLook, the flash-sale site the company bought in 2011 for around $200 million. HauteLook allowed Nordstrom to expand Rack's e-commerce "into a $1.4 billion plus digital business," according to Rack chief Geevy Thomas, far outpacing other off-pricers. Flash sales will continue, but under the Rack brand.

"[W]e have an unmatched digital presence in the off price space, which means we're the only off price retailer with a full transactional digital and physical ecosystem, we're able to engage with more customers in more ways and drive scale with less risk and lower capital intensity than our store-based competitors," Thomas said.

Some change coming to Rack is potentially riskier to the premium "Nordstrom" brand, though executives dismissed that notion Thursday. The off-pricer traditionally caters to a fashion-minded customer looking for a deal, less so to strictly price-driven consumers. To reach more shoppers, Nordstrom is "dramatically" expanding its price-driven inventory into some stores. The company is using demographic and store-level data to determine which locations will be price-driven, which will stick with the traditional Rack approach and which will have a hybrid. Rack's performance has lagged behind the company's full-line as well as its store-dependent peers. 

"With Nordstrom Rack underperforming the broader off-price segment in recent years, we believe the repositioning to a more price-focused model could allow the company to better compete with traditional off-price retailers," William Blair analyst Dylan Carden said in emailed comments, noting that its more mature digital operation is also an advantage. "As management focuses on bringing Rack’s digital margin at parity with its brick-and-mortar channel, there is potential for Rack to become the dominant digital player in the off-price space and significantly contribute to the total company’s margin expansion." 

Expanding merchandise assortment

Like many retailers, in order to sell more, Nordstrom is working to broaden its assortment, with the goal of expanding from about 300,000 items today to more than 1.5 million over the next three to five years. 

This will be accomplished through what Nordstrom executives all day emphasized will be a "digital-first" platform. Nordstrom's online selection is already nearly three times its physical store selection, and the company envisions that stretching to 20 times the store-based selection, President and Chief Brand Officer Pete Nordstrom said Thursday.

Unlike many retailers, however, including most recently Canadian department store Hudson's Bay, it won't create a digital marketplace to accomplish that. Rather, executives outlined a new approach to inventory management that shares more risk with vendors. The plan is reduce its traditional wholesale operation, which now provides 85% of its assortment, to provide 50%, by increasing drop-shipping and concessions and instituting a hybrid model with shared revenue and risk.

Overall, it's clear that Nordstrom is intent on opening all borders between its online and offline channels and its full-price and off-price businesses, in order to reach more people, notch more sales and make more money. "Our customers don't view themselves as store or digital shoppers, or only as Nordstrom or Nordstrom Rack shoppers," Chief Operating Officer Ken Worzel said. "They see us as one company, and they expect to be able to engage with us seamlessly across all of our touchpoints." 

Less clear is how soon this may be accomplished, several analysts said. While the pandemic disrupted its plans to some extent, Nordstrom, which was redrawing the department store model before the pandemic, appears to have accelerated its plans in the past year.

"Against the backdrop of a quickly changing retail environment, management focused on the company’s pivot to a digital-first platform and the opportunity to broaden the reach of the business," William Blair analysts said. "Nordstrom has taken advantage of the pandemic by pulling forward several omnichannel initiatives, from which it leaves the pandemic in an arguably more flexible and ever more customer-centric position."